Estimate average working capital required

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Reference no: EM13499069 , Length: 2788 Words

Task 1

The financial difficulties in 2000 make Citilink understand the importance of financial management. In view of the global financial fragility, Citilink's board of directors would like to take a review on the financial status of the company. As an independent business consultant, you have to write a FORMAL BUSINESS REPORT to the Board to address the following issues:

(a) Identify the sources of short/medium and long term finances available to Citilink now and in near future. You may refer to Appendix I to support your findings, if needed.

(b) Assess the legal, financial, control, and bankruptcy implications of the different sources identified at Task 1(a) above.

(c) Analyse the finance costs of the respective sources of finance, as identified at Task 1(a) above.

Task 2

Citilink has just completed its 2010/11 management accounts. The directors are going to review the financial statements in the next board meeting. You have to prepare a FINANCIAL REVIEW REPORT for presentation at the board in the capacity of the Finance Director of Citilink. In order to have a critical review, you have collected the financial statements of Grayline, the market leader in the bus transportation industry. All the financial statements are at June 30. The report should cover the following issues:

(a) Discuss the formation of financial statements by introducing debit, credit, books of prime entry, accounts and ledgers, trial balance, final accounts.

(b) As the company legal form evolved from sole trader, to partnership, and finally to corporation during the last 10 years, a lot of changes have been made on the format of financial statements. The indigenous founder requests you to explain and compare appropriate formats of financial statements for difference forms of companies.

(c) Explain how different types of finance and their costs appear in the financial statements of Citilink and the interaction of assets and liabilities on the balance sheet, using the financial statements at Appendix I to illustrate.

(d) Explain the structure and purpose of main financial statements, i.e. balance sheet, profit and loss account, cash flow statement, and notes, illustrate with the financial statements at Appendix I as far as possible.

(e) Discuss the changes to reporting requirements under the International Accounting Standards (IAS) e.g. statement of comprehensive income and statement of financial position, illustrate with the financial statements at Appendix I as far as possible

(f) Calculate and interpret with writing the financial statements at Appendix I using appropriate ratios, i.e. profitability, liquidity, efficiency and investment. Comparison should be made with prior year result and externally with Grayline. You should show clearly your working for the computation of ratios.

Task 3

Citilinkhas a business line currently owns and runs 350 sightseeing buses and has a turnover of $10 million per annum.The current system for allocating jobs to drivers is very inefficient. Citilink is considering the implementation of a new computerised tracking system called "DigiLink". This will make the allocation of jobs far more efficient.

You are the financial analyst of the business line. You have been asked to perform somecalculations to help the Finance Director to decide whether DigiLink should be implemented. The project is being appraised over 5 years.

The costs and benefits of the new system are set out below.

i. The central tracking system costs $2,100,000 to implement. This amount will be payable in three equalinstalments: one immediately, the second in one year's time, and the third in two years' time.

ii. Depreciation on the new system will be provided at $420,000 per annum.

iii. Staff will need to be trained how to use the new system. This will cost $425,000 in the first year.

iv. If DigiLink is implemented, revenues will rise to an estimated $11 million this year, thereafter increasing by 5%per annum (i.e. compounded). Even if DigiLink is not implemented, revenues will increase by an estimated$200,000 per annum, from their current level of $10 million per annum.

v. Despite increased revenues, DigiLink will still make overall savings in terms of vehicle running costs. These costsavings are estimated at 1% of the post DigiLink revenues each year (i.e. the $11 million revenue, rising by 5%thereafter, as referred to in note iv).
vi. 6 new operators will be recruited to manage the DigiLink system. Their salaries will cost the business line $120,000 per annum in the first year, $200,000 in the second year, thereafter increasing by 5% per annum(i.e. compounded).

vii. The business line will have to take out a maintenance contract for the DigiLink system. This will cost $75,000 per annum.

viii. Interest on money borrowed to finance the project will cost $150,000 per annum.

ix. The business line's cost of capital is 10% per annum and the maximum allowable payback period is 2.5 years.

x. Ignore taxation.

(a) Assess the viability of the DigiLink project using payback period, accounting rate of return, net present value, and internal rate of return.

(b) Evaluate appropriate sources of finance for the DigiLink project in terms of suitability and their respective advantages and disadvantages.

Task 4

Citilinkwill start a new business line on 1st July, 2011 tomake and sell bus souvenirs. The target sales and production volume are 525,000 in next year. The following projected data is available.

Total costs $1,428,000
Costs as percentage of sales
Raw materials 15%
Direct labour 20%
Variable production overheads 11%
Fixed production overheads 10%
Other costs 12%
Working capital statistics
Average raw material holding period 4 weeks
Average finished goods holding period 4 weeks
Average debtors' collection period 6 weeks
Average creditors' payment period on:
- Raw materials 4 weeks
- Direct labour 1 week
- Variable production overheads 8 weeks
- Fixed production overheads 5 weeks
- Other costs 12 weeks
Other relevant information
- Assume all operation will start at 1st July, 2011.
- Assume sales are the same every month oncethe souvenirs are available for sales.
- All finished goods inventory values include raw materials, direct labour, variable production overheads andapportioned fixed production overhead costs.
- Assume there are 52 weeks in one year.
- Assume that production and sales volumes are the same.

As an accountant of the new business line, you have to write a BUDGET PROPOSAL to the Finance Director of Citilink. The proposal should include the following issues:

(a) Identify who might be involved in the working capital decision making of the new business line and assess the information needs of them individually.

(b) Calculate with explanation the unit costs of the souvenirs. You should state your assumption, if any.

(c) Determine the priceof the souvenirs and explain any other information that might be relevant for deciding the price

(d) Discuss how sensitivity analysis will help the cost and pricing decision of the new business line

(e) Estimate average working capital required by the new business line for the year. Explain overtrading and analyse whether there is any overtrading problem if the new business line only reserves $150,000 working capital.

(f) Prepare a monthly cash budget for the new business line for the year ended 30th June, 2012. Identify the timing of cash surplus and shortage by assuming zero cash at 1st July, 2011. You should clearly state your assumption, if any.

(g) Identify other budgets that may be helpful to analyse and monitor the new business line. Explain.

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Reference no: EM13499069

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