CERTIFIED ACCOUNTING TECHNICIAN

Paper FFM

Foundations in Financial
Management
EXAM KIT


P AP ER F FM : FO UN DA TI ON S IN FIN AN CI AL MAN AGE ME N T

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Acknowledgements
The past ACCA exam questions are the copyright of the Association of Chartered Certified
Accountants. The original answers to the questions from June 2006 onwards were produced by
the examiners themselves and have been adapted by Kaplan Publishing.
We are grateful to the Chartered Institute of Management Accountants and the Institute of
Chartered Accountants in England and Wales for permission to reproduce past exam questions.
The answers have been prepared by Kaplan Publishing.
P. 2

KA PL AN P U BLI SH IN G


INTRODUCTION
This new edition of the ACCA Foundation Exam Kit is packed with exam-type questions, to help
you to prepare for your exam successfully.
•

Questions are grouped by syllabus topics and provide extensive coverage of all syllabus
areas.

•

All questions are of exam standard and format – this enables you to master the exam
techniques.

Past exam questions have been incorporated into the main body of questions within the kit and
are grouped by syllabus area.


PAPER ENHANCEMENTS
We have added the following enhancements to the answers in this exam kit:

Key answer tips
All answers include key answer tips to help your understanding of each question.

Tutorial note
All answers include more tutorial notes to explain some of the technical points in more detail.

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CONTENTS
Page
Index to questions and answers

P.7

Syllabus and revision guidance


P.11

The exam

P.19

Mathematical tables

P.21

Section
1

Multiple-choice questions

1

2

Practice questions

43

3

Answers to multiple-choice questions

125

4


Answers to practice questions

145

5

2011 Specimen Paper questions

281

6

Answers to 2011 Specimen Paper questions

287

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our
products, please send an email to with full details.
Our Quality Co-ordinator will work with our technical team to verify the error and take action to
ensure it is corrected in future editions.

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INDEX TO QUESTIONS AND ANSWERS
Page number
Question
Answer

MULTIPLE-CHOICE QUESTIONS (MCQs)
Cash receipts and payments
Cash balances and working capital management
Credit granting and debt collection
Sources of finance
Relevant costs
Capital investments
Legal issues
June 2009 sample multiple-choice questions (published by ACCA)
June 2009 Exam Paper multiple-choice questions
December 2009 Exam Paper multiple-choice questions
Selected June 2010 Exam Paper multiple-choice questions
December 2010 Exam Paper multiple-choice questions
June 2012 Pilot Paper multiple-choice questions

1
4
8
12
16
20

23
25
28
30
33
36
39

125
127
129
131
133
135
136
137
138
138
140
142
143

PRACTICE QUESTIONS
Cash receipts and payments
1
2
3
4
5
6

7
8
9
10
11
12
13
14
15

Automotive
Antipodean Enterprises
Aida plc
CF
Budgeted cash flow
Harrow Credit
Treasury department
Chocoholics
Williams
Cash management
Bathroom company
Cleanly
Health Foods Company
Porky’s Ltd
Cool Ski Co

43
45
46
47

48
49
49
50
51
52
52
52
54
55
57

145
147
149
150
151
153
153
155
157
158
158
159
160
162
163

16
17

18
19
20

Alan Webb 1
Print Co
Rich Co
Tastee Co (June 10 exam)
Joe (June 2012 Pilot Paper)

58
59
61
62
64

166
167
169
170
173

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P AP ER F FM : FO UN DA TI ON S IN FIN AN CI AL MAN AGE ME N T

Page number

Question
Answer

Cash balances and working capital management
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

Golf balls
Victory (1)
Victory (2)
Bags
PRT
East Meets West
Rant
Pooch
Shoes for You

Camp Company
All Weather Windows Co
The Kitchen Co
Brush Co
Choc Co
Expand Co (Dec 10 exam)
I Co (June 2012 Pilot Paper)

65
65
66
66
67
68
69
70
71
72
73
74
75
76
77
78

174
176
177
178
181

184
185
186
187
188
189
191
192
194
195
197

78
79
79
80
81
82
82
83
83
83
84
85
86
87
87
88
89
89

90
91

199
200
202
204
205
206
207
208
210
211
212
214
215
216
218
219
220
221
222
223

Credit granting and debt collection
37
38
39
40
41

42
43
44
45
46
47
48
49
50
51
52
53
54
55
56

P. 8

Slowpayer (1)
Slowpayer (2)
Ontime plc
Painter
Books (2)
Expander
Credit control policy (1)
Credit control policy (2)
G
AAD
Lace
Skint

Duel Fuel
Fibre Clean
Noise
Jay
Waste Co
Light Co
Curtain Co
D Co (June 2012 Pilot Paper)

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IN DE X TO Q UE S T ION S A N D A N S WE R S

Page number
Question
Answer

Sources of finance
57
58
59
60
61
62
63
64
65
66
67

68
69
70
71
72
73

Bugs
Loan Inc
DEB plc
Hobble plc
DF
Clean Lens
Gym Jam
AIM
Financial matters
Financial analysts
Zimmer plc
Banks and money markets
Slim Jim Co
Long term finance
Bake Co (Dec 10 exam)
Financial Intermediation (June 2012 Pilot Paper )
L Co (June 2012 Pilot Paper – amended)

91
92
92
94
94

95
96
96
97
97
97
98
98
98
99
99
99

224
225
226
227
229
231
232
233
234
235
238
240
242
244
246
248
249


100
101
102

250
251
252

103
104
105
107
107
108
110
111
113
114
115
117
118
120
121
122
124
124

253
255

256
258
259
260
261
263
264
265
266
269
270
272
273
276
278
279

Relevant costs
74
75
76

Publishing company
ZCC
John Robertson

Capital investments
77
78
79

80
81
82
83
84
85
86
87
88
89
90
91
92
93
94

Soke plc
Law plc
Jairzinho plc
Computer update
Rainbow
Paradise
Taxi
Silly Filly
Weavers
Nippers
Go Green
Alan Webb 2
Wicker Co
Painless Co

King Edward’s Hospital (June 10 exam)
Mr Food (Dec 10 exam)
Hockey Club (June 2012 Pilot Paper)
Capital budgeting

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SYLLABUS AND
REVISION GUIDANCE
SYLLABUS CONTENT

Study Guide
A

WORKING CAPITAL MANAGEMENT

1

Working capital management cycle
(a)

(b)
(c)
(d)
(e)
(f)
(g)

2

Define working capital.[k]
Explain why working capital management is important.[k]
Explain the relationship between cash flows and the working capital cycle.[s]
Demonstrate the calculation of the working capital cycle (also known as the cash
operating cycle) .[s]
Outline the possible relationships between inventory levels and sales.[s]
Define and explain over-trading and over-capitalisation.[s]
Identify and calculate over-trading and over-capitalisation financial indicators.[s]

Inventory control
(a)

Discuss the key considerations when developing an inventory ordering and storage
policy.[s]

(b)

Define and explain work in progress.[k]

(c)


Define economic order quantity (EOQ) .[k]

(d)

Apply the EOQ model.[s]

(e)

Discuss the effects of just-in-time on inventory control.[s]

(Note: Economic Batch Quantities, where all items in a batch do not arrive simultaneously,
will not be examined)

3

Accounts payable and receivables control
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

Explain the role of accounts payables in the working capital cycle.[k]
Explain the role of accounts receivables in the working capital cycle.[k]
Explain the need to monitor accounts payables.[s]
Explain accounts payables control operations and the importance of accounts
payables management.[s]

Describe the various types and form of accounts payables.[k]
Describe the various accounts payables payment methods and procedures (for
example, direct debit, cheque).[s]
Evaluate and demonstrate the issues involved with early payment and settlement
discounts.[s]
Identify the risks of taking increased credit and buying under extended credit
terms.[s]

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B

CASH BUDGETING

1

Nature and sources of cash

2

(a)

Define cash, cash flow and funds.[k]

(b)


Explain the importance of cash flow management and its impact on liquidity and
company survival.[s]

(c)

Outline the various sources and applications of finance.[k]
(i)

Regular revenue receipts and payments

(ii)

Capital receipts and payments

(iii)

Drawings or dividends and disbursements

(iv)

Exceptional receipts and payments

(d)

Distinguish between the cash flow patterns of different types of organisations.[s]

(e)

Explain the importance of cash flow for sustainable growth of such organisations.[s]


(f)

Define “cash accounting” and “accruals accounting” .[k]

(g)

Explain the difference between cash accounting and accruals accounting.[k]

(h)

Reconcile cash flow to profit.[s]

Cash budgeting and forecasting
(a)

Explain the objectives of a cash budget.[k]

(b)

Explain and illustrate statistical techniques used in forecasting cash flows.[s]

(c)

Explain inflation and the impact on cash flow and profit.[k]

(d)

Prepare a cash budget, including adjustments for timing of receipts and payments.[s]


(e)

Discuss and illustrate how cash budgets can be used as a mechanism for monitoring
and control.[s]

(f)

Carry out simple sensitivity analysis on a cash budget or forecast.[s]

(g)

Prepare a simple cleared funds forecast.[s]

C

MANAGING CASH BALANCES

1

Treasury function

2

P. 12

(a)

Outline the basic treasury functions.[k]

(b)


Discuss the advantages and disadvantages of a centralised treasury function.[k]

(c)

Discuss the advantages and disadvantages of centralised cash control.[k]

(d)

Describe cash handling procedures (including recording practises.[k]

(e)

Describe the issues to be considered when attempting to hold optimal cash
balances.[s]

(f)

Outline the statutory and the other regulations relating to the management of
cash.[k]

Overview of financial markets
(a)

Explain the role and functions of various types of banks (including the structure of
the banking system) [k]

(b)

Identify the major financial intermediaries.[k]


(c)

Outline the general roles of financial intermediaries.[k]

(d)

Outline the key benefits of financial intermediation .[k]
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S YLL A BU S AN D RE VI SI ON G UI DA N CE

(e)

Outline the relationships between financial institutions.[k]

(f)

Explain the purpose and main features of: .[s]

(g)

3

4

(i)

Bank deposits


(ii)

Certificates of deposit

(iii)

Government stocks

(iv)

Local authority bonds

(v)

Bills of exchange

Explain the purpose and main features of: .[s]
(i)

Equity

(ii)

Preferred shares

(iii)

Debentures


(iv)

Unsecured loan stock

(v)

Convertible and redeemable debts

(vi)

Warrants

(h)

Explain the basic nature of a money market.[k]

(i)

Describe the way in which a stock market (both main and second tier) operates.[k]

(j)

Discuss ways in which a company may obtain a stock market listing and the
advantages and disadvantages of having a stock market listing.[s]

Managing deficit cash balances
(a)

Discuss situations where it may be appropriate to raise short-term finance.[s]


(b)

Describe the different forms of bank loans and overdrafts, their terms and
conditions.[s]

(c)

Explain the legal relationship between bank and customer.[k]

(d)

Explain the nature of trade credit and its use as a short-term source of finance.[s]

(e)

Evaluate the risks associated with increasing the amount of short-term finance in an
organisation.[s]

(f)

Discuss the relative merits and limitations of short term finance.[s]

Managing surplus cash balances
(a)

Define what is meant by “surplus funds” .[k]

(b)

Explain how surplus funds may arise.[k]


(c)

Discuss the objectives to be considered in the investment of surplus funds.[s]

(d)

Invest surplus funds according to organisational policy and within defined financial
authorisation limits.[s]

(e)

Define the risk-return trade-off.[k]

(f)

Outline what is meant by risk of default, systematic risk and unsystematic risk.[k]

(g)

Outline how the Baumol cash management model works. (Note: Calculations are not
required) .[k]

(h)

Discuss the limitations of the Baumol cash management model.[k]

(i)

Suggest appropriate liquidity levels for a range of different organisations.[s]


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D

FINANCING DECISIONS

1

Money in the economy

2

3

4

P. 14

(a)

Define what is meant by “money supply” in an economic context.[k]

(b)


Outline how money supply may be controlled in an economy.[k]

(c)

Outline the basic relationship between the demand for money and interest rates.[k]

(d)

Explain briefly and illustrate the interaction between inflation and interest rates.[s]

(e)

Discuss the possible consequences of inflation in an economy and its effect on
organisations in general .[k]

(f)

Describe how the application of different monetary policies can affect the
economy.[k]

Medium term financing
(a)

Discuss situations where it may be appropriate to raise medium-term finance.[s]

(b)

Describe the main features of hire purchase, and leases.[k]

(c)


Compare and contrast the main features of hire purchase, and leases (NB – lease or
buy decisions are not examinable) .[s]

(d)

Discuss the relative merits and limitations of medium term finance.[s]

Long term financing
(a)

Discuss situations where it may be appropriate to raise long-term finance.[s]

(b)

Describe key factors to be considered when deciding on an appropriate source of
long term finance (debt or equity) .[s]

(c)

Calculate relative gearing and earnings per share under different financial
structures.[s]

(d)

Discuss the relative merits and limitations of long term finance.[s]

(e)

Describe the key factors that should be considered in deciding the mix of

short/medium/long term finance in an organisation.[s]

(f)

Discuss the nature and importance of internally generated funds.[k]

(g)

Outline the major sources of government funds e.g. grants, regional and national
schemes.[k]

Financing for small and medium sized enterprises
(a)

Outline the requirements for finance of SMEs (purpose, how much, how long) .[k]

(b)

Describe the nature of the financing problem for SMEs in terms of the funding gap,
maturity gap and inadequate security.[s]

(c)

Discuss the contribution of lack of information in SMEs to help explain the problems
of SME financing.[k]

(d)

Describe and discuss the response of government agencies and financial institutions
to the SME financing problem.[s]


(e)

Describe the main features of venture capital.[k]

(f)

Describe the key areas of concern to venture capitalists when evaluating an
application for funding.[s]

(g)

Explain how the use of such measures as credit suppliers, hire purchase, factoring
and second tier listing can help to ease the financial problems of SMEs.[s]

(h)

Outline appropriate sources of finance for SMEs.[s]
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S YLL A BU S AN D RE VI SI ON G UI DA N CE

E

INVESTMENT DECISIONS

1

Financing concepts


2

3

(a)

Explain the differences between simple and compound interest.[k]

(b)

Calculate future values.[s]

(c)

Discuss the concept of time value of money.[s]

(d)

Discuss the concept of discounting.[s]

(e)

Calculate present values, making use of present value tables to establish discount
factors.[s]

Capital budgeting
(a)

Discuss the importance of capital investment planning and control.[k]


(b)

Outline the issues to consider and the steps involved in the preparation of a capital
expenditure budget.[s]

(c)

Define and distinguish between capital and revenue expenditure.[k]

(d)

Compare and contrast investment in non-current assets and investment in working
capital.[k]

(e)

Describe capital investment procedures (authorisation and monitoring) .[k]

Capital investment appraisal
(a)

Calculate the payback and discounted payback of a project and assess its usefulness
as a method of investment appraisal.[s]

(b)

Calculate the accounting rate of return of a project and assess its usefulness as a
method of investment appraisal.[s]


(c)

Discuss the concept of relevant cash flows for decision making.[k]

(d)

Identify and evaluate relevant cash flows for individual investment decisions.[s]

(e)

Explain the concept of net present value and how it can be used for project
appraisal.[k]

(f)

Calculate net present value and interpret the results.[s] (Note: NPV calculations will
not include adjustments for inflation, tax or working capital)

(g)

Outline the concept of internal rate of return and how it can be used for project
appraisal.[k]

(h)

Calculate internal rate of return and interpret the results.[s]

(i)

Discuss the relative merits of NPV and IRR, including mutually exclusive projects and

multiple yields.[k]

(j)

Explain the superiority of DCF methods over payback and accounting rate of
return.[k]

F

CREDIT MANAGEMENT

1

Legal issues
(a)

Explain the key elements of a basic contract (offer, acceptance, remedies for breach
of contract etc) [k]

(b)

Briefly outline specific terms and conditions that may be included in contracts with
credit customers (e.g. length of credit period, amount of interest on late payments,
retention of title.[s]

(c)

Outline the basic legal procedures for the collection of debts.[k]

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P AP ER F FM : FO UN DA TI ON S IN FIN AN CI AL MAN AGE ME N T

2

3

4

P. 16

(d)

Identify the main data protection issues that should be considered when dealing with
accounts receivables records.[k]

(e)

Explain bankruptcy and insolvency.[k]

Credit granting
(a)

Explain the importance of credit management, including the level of trade credit, the
role of the credit control function and the activities of the credit control function.[k]

(b)


Explain the need to establish a credit policy and outline the steps involved, including
setting maximum credit amounts and periods and total credit levels.[s]

(c)

Explain the key categories that should be considered when assessing the creditworthiness of a customer.[k]

(d)

Outline the various internal sources of information that may be used in assessing the
credit-worthiness of a customer.[s]

(e)

Outline the various external sources of information that may be used in assessing the
credit-worthiness of a customer. [s]

(f)

Define and explain credit scoring.[k]

(g)

Identify possible reasons for rejecting an application for credit or extending credit.[s]

(h)

Describe how the financial statements of a customer can be used to assess the
credit-worthiness of a customer.[s]


(i)

Identify and apply the common ratios that may be used to analyse the financial
statements of a customer in order to assess their credit-worthiness.[s]

(j)

Evaluate the usefulness and limitations of ratio analysis in assessing creditworthiness.[s]

Monitoring accounts receivables
(a)

Identify the main contents of accounts receivables records.[s]

(b)

Describe the main internal sources that may be used to monitor accounts receivables
(including aged trade receivables analysis, average periods of credit, incidence of bad
debts). [s] Note: You may be required to prepare an aged accounts receivables
analysis

(c)

Describe the main external sources that may be used to monitor accounts
receivables (including credit rating agencies, industry sources, financial reports, press
coverage, official publications, bank or supplier reference,) [s]

Debt collection
(a)


Identify the main methods used to identify potential problems with credit customers
meeting their payment obligations.[k]

(b)

Describe ways in which credit customers could be encouraged to pay promptly
including effects of offering discounts[s]

(c)

Describe the main techniques and methods that may be used to assist in the
collection of overdue debts.[s]

(d)

Identify debt recovery methods appropriate to individual customers.[s]

(e)

Explain procedures for writing off debts (double entry recording is excluded) .[k]

(f)

Describe how factoring works and the main types of service provided by factors.[s]

(g)

Define invoice discounting and outline how this form of factoring works.[s]


(h)

Calculate the cost of factoring arrangements, invoice discounting and changes in
credit policy.[s]
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S YLL A BU S AN D RE VI SI ON G UI DA N CE

PLANNING YOUR REVISION
Begin by asking yourself
two questions:

How much time do I have
available for revision?

Remember to take into account:
• times of the day when you
work most effectively
• other commitments
• time definitely unavailable (e.g.
holidays)
• relaxation time.

What do I need to cover
during my revision?

Remember to take into account that:
• all syllabus areas are equally
examinable

• you need more time when revising
areas of the syllabus you feel least
confident about
• question practice is the best form
of revision.

Make a timetable/plan to remind yourself how much
work you have to do and when you are free to do it.
Allow some time for slippage.

REVISION TECHNIQUES
•

Go through your notes and textbook highlighting the important points.

•

You might want to produce your own set of summarised notes.

•

List key words for each topic to remind you of the essential concepts.

•

Practise exam-standard questions, under timed conditions.

•

Rework questions that you got completely wrong the first time, but only when you think

you know the subject better.

•

If you get stuck on topics, find someone to explain them to you (your tutor or a colleague,
for example).

•

Read recent articles on the ACCA website or in the student magazine.

•

Read good newspapers and professional journals.

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THE EXAM
FORMAT OF THE EXAMINATION
Two-hour written paper:

Section A: 10 multiple-choice questions, worth 1, 2 or 3 marks each

Number of marks
20

Section B: 6 compulsory longer questions
Q1 (20 marks)

20

Q2, 3 & 4 (10 marks each)

30

Q5 & 6 (15 marks each)

30
––––
100
––––

Sitting the examination

Answering the questions

Spend the first few minutes of the examination
reading the paper, deciding which question to
answer first.

Discussion questions: Make a quick plan in

your answer book and under each main point
list all the relevant facts you can think of. Then
write out your answer developing each point
fully. Be concise. It is better to write a little
about a lot of different points than a great deal
about one or two points.

Unless you know exactly how to answer the
question, spend some time planning your
answer. Stick to the question and tailor your
answer to what you are asked.
Fully explain all your points but be concise. Set
out all workings clearly and neatly, and state
briefly what you are doing. Don’t write out the
question.
If you do not understand what a question is
asking, state your assumptions. Even if you do
not answer precisely in the way the examiner
hoped, you should be given some credit, if your
assumptions are reasonable.
If you get stuck with a question, leave space in
your answer book and return to it later.

Computations: It is essential to include all your
workings in your answers. Many computational
questions require the use of a standard format:
company profit and loss account, statement of
financial position (balance sheet) and cash flow
statement for example. Be sure you know
these formats thoroughly before the

examination and use the layouts that you see
in the answers given in this book and in model
answers. If you are asked to comment or make
recommendations on a computation, you must
do so. There are important marks to be gained
here. Even if your computation contains
mistakes, you may still gain marks if your
reasoning is correct.
Reports, memos and other documents: Some
questions ask you to present your answer in
the form of a report or a memo or other
document. Read the instructions carefully and
use the correct format.

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MATHEMATICAL TABLES
PRESENT VALUE TABLE
Present value of 1 i.e. (1 + r) – n
where


r = discount rate
n = number of periods until payment

Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

1%
0.990
0.980
0.971
0.961
0.951
0.942
0.933

0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861

2%
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743

3%
0.971
0.943
0.915

0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642

(n)

11%

12%

1
2
3
4
5
6
7
8
9
10
11

12
13
14
15

0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209

0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361

0.322
0.287
0.257
0.229
0.205
0.183

KA PL AN P U BLI SH IN G

4%
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555

Discount rate (r)
5%
6%
7%

0.952 0.943 0.935
0.907 0.890 0.873
0.864 0.840 0.816
0.823 0.792 0.763
0.784 0.747 0.713
0.746 0.705 0.666
0.711 0.665 0.623
0.677 0.627 0.582
0.645 0.592 0.544
0.614 0.558 0.508
0.585 0.527 0.475
0.557 0.497 0.444
0.530 0.469 0.415
0.505 0.442 0.388
0.481 0.417 0.362

8%
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368

0.340
0.315

9%
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275

10%
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424

0.386
0.350
0.319
0.290
0.263
0.239

13%

14%

15%

16%

17%

18%

19%

20%

0.885
0.783
0.693
0.613
0.543
0.480
0.425

0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160

0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140

0.870
0.756
0.658
0.572
0.497

0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123

0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108

0.855
0.731
0.624

0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095

0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084

0.840

0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074

0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065


1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
1
2
3
4
5
6
7
8
9
10
11
12
13
14

15

P. 21


P AP ER F FM : FO UN DA TI ON S IN FIN AN CI AL MAN AGE ME N T

ANNUITY TABLE
Present value of an annuity of 1 i.e.

where

1 – (1 + r)–n
r

r = discount rate
n = number of periods

Periods

Discount rate (r)
5%
6%
7%

(n)

1%

2%


3%

4%

1
2
3
4
5

0.990
1.970
2.941
3.902
4.853

0.980
1.942
2.884
3.808
4.713

0.971
1.913
20829
3.717
4.580

0.962

1.886
2.775
3.630
4.452

0.952
1.859
2.723
3.546
4.329

0.943
1.833
2.673
3.465
4.212

6
7
8
9
10

5.795
6.728
7.652
8.566
9.471

5.601

6.472
7.325
8.162
8.983

5.417
6.230
7.020
7.786
8.530

5.242
6.002
6.733
7.435
8.111

5.076
5.786
6.463
7.108
7.722

11
12
13
14
15

10.37

11.26
12.13
13.00
13.87

9.787
10.58
11.35
12.11
12.85

9.253
9.954
10.63
11.30
11.94

8.760
9.385
9.986
10.56
11.12

(n)

11%

12%

13%


1
2
3
4
5

0.901
1.713
2.444
3.102
3.696

0.893
1.690
2.402
3.037
3.605

6
7
8
9
10

4.231
4.712
5.146
5.537
5.889


11
12
13
14
15

6.207
6.492
6.750
6.982
7.191

P. 22

8%

9%

10%

0.935
1.808
2.624
3.387
4.100

0.926
1.783
2.577

3.312
3.993

0.917
1.759
2.531
3.240
3.890

0.909
1.736
2.487
3.170
3.791

1
2
3
4
5

4.917
5.582
6.210
6.802
7.360

4.767
5.389
5.971

6.515
7.024

4.623
5.206
5.747
6.247
6.710

4.486
5.033
5.535
5.995
6.418

4.355
4.868
5.335
5.759
6.145

6
7
8
9
10

8.306
8.863
9.394

9.899
10.38

7.887
8.384
8.853
9.295
9.712

7.499
7.943
8.358
8.745
9.108

7.139
7.536
7.904
8.244
8.559

6.805
7.161
7.487
7.786
8.061

6.495
6.814
7.103

7.367
7.606

11
12
13
14
15

14%

15%

16%

17%

18%

19%

20%

0.885
1.668
2.361
2.974
3.517

0.877

1.647
2.322
2.914
3.433

0.870
1.626
2.283
2.855
3.352

0.862
1.605
2.246
2.798
3.274

0.855
1.585
2.210
2.743
3.199

0.847
1.566
2.174
2.690
3.127

0.840

1.547
2.140
2.639
3.058

0.833
1.528
2.106
2.589
2.991

1
2
3
4
5

4.111
4.564
4.968
5.328
5.650

3.998
4.423
4.799
5.132
5.426

3.889

4.288
4.639
4.946
5.216

3.784
4.160
4.487
4.772
5.019

3.685
4.039
4.344
4.607
4.833

3.589
3.922
4.207
4.451
4.659

3.498
3.812
4.078
4.303
4.494

3.410

3.706
3.954
4.163
4.339

3.326
3.605
3.837
4.031
4.192

6
7
8
9
10

5.938
6.194
6.424
6.628
6.811

5.687
5.918
6.122
6.302
6.462

5.453

5.660
5.842
6.002
6.142

5.234
5.421
5.583
5.724
5.847

5.029
5.197
5.342
5.468
5.575

4.836
4.988
5.118
5.229
5.324

4.656
4.793
4.910
5.008
5.092

4.486

4.611
4.715
4.802
4.876

4.327
4.439
4.533
4.611
4.675

11
12
13
14
15

KA PL AN P U BLI SH IN G


Section 1

MULTIPLE-CHOICE QUESTIONS

CASH RECEIPTS AND PAYMENTS
1

2

A cash budget prepared for the forthcoming three months shows a substantial cash

surplus in the first two months. Suitable actions would be to:
(i)

pay suppliers early to receive a cash discount

(ii)

buy new plant and machinery

(iii)

invest in treasury bills.

A

(i) and (ii)

B

(i) and (iii)

C

(ii) and (iii)

D

(i) only

(2 marks)


Vincent is preparing a cash budget for July. His credit sales are as follows.
April (actual)
May (actual)
June (actual)
July (estimated)

$
40,000
30,000
20,000
25,000

His recent debt collection experience has been as follows.
Current month’s sales
Prior month’s sales
Sales two months prior
Cash discounts taken
Irrecoverable debts

20%
60%
10%
5%
5%

How much may Vincent expect to collect from credit customers during July?
A

$18,000


B

$20,000

C

$21,000

D

$24,000

KA PL AN P U BLI SH IN G

(3 marks)

1


P AP ER F FM : FO UN DA TI ON S IN FIN AN CI AL MAN AGE ME N T

3

DRF’s projected revenue for 20X9 is $28,000 per month. All sales are on credit. Receivables’
accounts are settled 50% in the month of sale, 45% in the following month, and 5% are
written off as irrecoverable debts after two months.
What are the budgeted cash collections for March?

4


A

$24,500

B

$26,600

C

$28,000

D

$32,900

(2 marks)

A company anticipates that 10,000 units of product z will be sold during January. Each unit
of z requires 2 litres of raw material w. Actual stocks as of 1 January and budgeted
inventories as of 31 January are as follows.
Product z (units)
Raw material w (litres)
1 litre of w costs $4.

1 January
14,000
20,000


31 January
12,000
15,000

If the company pays for all purchases in the month of acquisition, what is the cash outlay
for January purchases of w?

5

A

$84,000

B

$80,000

C

$44,000

D

$12,000

(3 marks)

A company has a two-month receivables’ cycle. It receives in cash 45% of the total gross
sales value in the month of invoicing. Irrecoverable debts are 20% of total gross sales value
and there is a 10% discount for settling accounts within 30 days.

What proportion of the first month’s sales will be received as cash in the second month?

2

A

25%

B

30%

C

35%

D

55%

(2 marks)

KA PL AN P U BLI SH IN G


MU L TIP LE -C HO ICE Q UES TI ON S : S E CT I ON 1

6

Spears makes gross sales of $40,000 per month, of which 10% are for cash, the rest on

credit.
Experience shows the following.
Receivables paying
within one month
within two months
Settlement discounts (for payment within one month)

40%
50%
4%

Total expected cash receipts in any month will be:

7

A

$35,824

B

$36,400

C

$38,560

D

$40,000


(2 marks)

Selected figures from a firm’s budget for next month are as follows.
Sales
Gross profit on sales
Decrease in trade payables over the month
Increase in cost of inventory held over the month

$450,000
30%
$10,000
$18,000

What is the budgeted payment to trade payables?

8

A

$343,000

B

$323,000

C

$307,000


D

$287,000

(2 marks)

A company has a current cash balance of $7,000, trade receivables of $15,000 and trade
payables of $40,000. The company can sell goods costing $50,000 for £$70,000 next month.
One half of all sales are collected in the month of sale and the remainder in the following
month. All purchases are made on credit and paid during the following month. Inventory
levels will remain constant during the month. General cash expenses will be $60,000 during
the month.
The cash balance at the end of the month is
A

$25,000 overdrawn

B

$26,000 overdrawn

C

$33,000 overdrawn

D

$43,000 overdrawn

KA PL AN P U BLI SH IN G


(3 marks)

3