In the view of the information provided below provide suggestions for the efficient management of trade debtors. INFORMATION MANAGEMENT OF TRADE DEBTORS Debtor management is central to the effective cash flow of any business. Without an effective debtor control system, the finances are vulnerable. Many enterprises are often guilty of failing to establish an appropriate debtor management system. Cash flows can be significantly enhanced if the amounts owing to a business are collected faster. Slow payments can have a crippling effect on an enterprise. If accounts receivables are not properly managed this will lead to reduced cash flows and ultimately an increased incidence of bad debts. Source: www.equifax.com.au KK 2 2.1 REQUIRED Use the information given below to calculate the value of closing inventory as at 30 September 2019 and the value of issues/transfers to the production department during September 2019 using the: 2.1.1 First-in-first-out (FIFO) method (5 marks) 2.1.2 Weighted average cost method. (5 marks) INFORMATION The following information for September 2019 was extracted from the records of Santini Limited, a manufacturing company, for an inventory item used in production: Date Transactions 01 04 08 13 27 30 Opening inventory: 3 000 units @ R18 each Invoice received for 22 000 units @ R19 each Returned 5 000 damaged units (purchased 04 September 2019) to the supplier Invoice received for 25 000 units at R20 each Invoice received for 5 000 units @ R21 each Transferred 44 000 units to the production department during September 2019 Santini Limited uses the periodic inventory system. 2.2 REQUIRED Study the information given below and calculate the cost (as a percentage) to Hillary Stores of not accepting the discount. (5 marks) INFORMATION Sandton Wholesalers credit terms to Hillary Stores are 30 days but the supplier is prepared to allow a 2% rebate if Hillary Stores pays the account within 15 days. 2.3 REQUIRED Use the information provided below to calculate the annual Economic Order Quantity (EOQ). (5 marks) INFORMATION Harrods Traders purchases a product which has a monthly demand of 12 000 units. The cost to place an order is R10 and the holding cost is R2 per unit. QUESTION 2 (20 Marks) KK 3 QUESTION 3 (20 Marks) REQUIRED Use the information provided below to prepare the following for Electroman Limited for August and September 2020 (using separate monetary columns for each month): 3.1 Debtors Collection Schedule (4 marks) 3.2 Cash Budget. (16 marks) Note: Where applicable, round off amounts to the nearest Rand. INFORMATION Electroman Limited sells appliances. The following forecasts were made: 1. The bank balance on 31 July 2020 is expected to be R50 000 (favourable). 2. Sixty percent (60%) of all sales are for cash; the balance is on credit. Credit sales for June and July 2020 are expected to be R320 000 and R360 000 respectively. Sales are expected to increase by 10% each month. Twenty percent (20%) of the credit sales are expected to be settled during the month of the sale for a discount of 5%. The remaining customers usually pay in the month after the sale. 3. All appliances are purchased on credit and the creditors are paid in the month after the purchase. Purchases are expected to be as follows: July R420 000 August R460 000 September R510 000 4. Salaries and wages are expected to cost R85 800 for September 2020, after a 10% increase takes effect on 01 September 2020. 5. Advertising expenses are expected to be 6% of the total monthly sales, and are paid one month later. 6. Equipment that cost R300 000 is expected to be purchased during August 2020. A deposit of 10% will be paid in August and the balance plus finance charges of R20 000 is payable in 5 equal instalments commencing September 2020. 7. A long-term loan of R250 000 at 12% per annum interest is to be raised on 01 August 2020. Interest on loan and a loan repayment of R5 000 is payable monthly on the last day of each month, commencing 31 August 2020. 8. Other cash expenses are expected to amount to R80 000 for July 2020. These expenses are expected to increase by 5% each month. 9. An interim dividend of 8 cents per share is expected to be paid to shareholders on 31 August 2020. The issued share capital of Electroman Limited consists of 500 000 ordinary shares. KK 4 QUESTION 4 (20 Marks) REQUIRED 4.1 Use the information provided below to calculate the following ratios for 2018. Where applicable, round off answers to two decimal places. 4.1.1 Gross margin (2 marks) 4.1.2 Debtors collection period (2 marks) 4.1.3 Inventory turnover (use average inventory) (2 marks) 4.1.4 Return on equity (2 marks) 4.1.5 Debt to assets (2 marks) 4.1.6 Current ratio (2 marks) 4.1.7 Creditors payment period (2 marks) 4.2 Comment briefly but meaningfully on the following ratios: 2018 2017 4.2.1 Acid test ratio 1.73:1 1.87:1 (2 marks) 4.2.2 Profit margin 10.08% 5.21% (2 marks) 4.2.3 Return on assets 39.47% 28.67% (2 marks) INFORMATION Excerpts of financial data of Scorpio Limited for 2018 are as follows: STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 R Sales 7 040 000 Cost of sales (4 576 000) Gross profit 2 464 000 Operating profit 1 056 000 Interest expense (70 400) Profit before tax 985 600 Tax (275 968) Profit after tax 709 632 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 R Assets Non-current assets 1 372 800 Inventories 633 600 Accounts receivable 422 400 Cash 246 400 2 675 200 Equity and liabilities Equity 1 689 600 Long-term loan 598 400 Accounts payable 316 800 Other current liabilities 70 400 2 675 200 KK 5 Note: Inventories as at 31 December 2017 amounted to R528 000. All purchases and sales of inventories are on credit. QUESTION 5 (20 Marks) Note: Where applicable, use the present value tables provided in APPENDICES 1 and 2 that appear after QUESTION 5. REQUIRED Study the information given below and answer the following questions 5.1 Calculate the Benefit Cost Ratio of the two investment alternatives (answer expressed to two decimal places). (6 marks) 5.2 Which investment alternative would you recommend? Explain your choice. (1 mark) 5.3 Calculate the Payback Period of Option B (answer expressed in years, months and days). (3 marks) 5.4 Calculate the Accounting Rate of Return (on average investment) of Option B (answer expressed to two decimal places). (4 marks) 5.5 Calculate the Internal Rate of Return of Option A if the net cash flow per year is R95 000 for 5 years (answer expressed to two decimal places). (6 marks) INFORMATION Azowel Limited is planning a new business venture. With R300 000 available funds to invest, it is investigating two options: Option A is to acquire an exclusive contract to operate payment machines in parkades in a city for five years. The contract requires the firm to pay R300 000 cash at the beginning of the contract. The firm expects cash revenues from the operation to be R400 000 per year and cash expenses to be R280 000 per year. Option B is to operate a photocopy shop in a shopping mall. This option would require the company to spend R300 000 for photocopy equipment that have a useful life of five years. The net cash flow per year is expected to be R105 000. The profit per year is expected to amount to R45 000. The company requires a 12% rate of return on its investment projects.