Reference no: EM131204472

ACCOUNTING SECTION

PART A

You have been appointed Finance Director of Cameron Ltd, a small private company run by Mr. and Mrs. Cameron organizing corporate events. Mr Cameron has asked you to prepare set of financial statements for the year ended 31 December 2015 as soon as possible, as the previous financial controller has left the company.

Trial Balance as at 31 December 2015

	DR	CR
	£'000	£'000
Advertising	25
Bank	248
Creditors		75
Bank Loan		60
Bank Interest	5
Debtors	415
Directors salaries	115
Electricity	38
Insurance	25
Motor Vehicles:
At Cost	150
Accumulated depreciation (at 1.1.2015)		75
Fixtures and Fittings
At Cost	400
Accumulated depreciation (at 1.1.2015)		200
Office expenses	69
£1 Ordinary share capital (issued and fully paid)		250
Profit and loss account (at 1.1.2015)		172
Purchases	2,775
Rent	93
Rates	28
Sales		3,873
Stock (at 1.1.2015)	176
Wages and salaries	143
TOTAL	4705	4705

You manage to extract the following information from the records left by the previous accountant:

Additional Information:

1. Stock at 31st December 2015

2. Valued at cost amounted to £14,000

3. Depreciation is to be provided on both motor vehicle and fixtures and fittings at 20% and 25% respectively on cost.

4. Provision is to be made for advertising fees of £10,000.

5. Rent paid in advance at 31st December 2015 amounted to £5,000

6. Corporation tax based on the profits for the year of £ 65,000 is to be provided.

7. An ordinary dividend of 10p per share is proposed.

You are required to prepare Cameron Ltd's Profit and Loss account for the year ended 31st December 2015 and Balance Sheet as at that date

PART B

Mr Cameron also requests you to prepare a forecast cash flow statement for his daughter Sophie. She wants to start Crèche for City Executives and Mr Cameron is also considering lending Sophie some money. He provides you with the following information:

1. Sophie will invest capital in cash of £50,000. She will also obtain a bank loan at 4% interest per annum of £150,000. Mr Cameron would be the guarantor for the loan Monthly interest due will be paid at the end of each month. At the end of the year, Sophie will repay £25,000 of the loan capital sum.

2. Sophie will purchase a five-year lease on premises for £125,000 cash. Other fixed assets will also be purchased on day one for £40,000. Depreciation will reflect a five-year useful life, using straight-line method of depreciation.

3. Staff wages will total £15,000 per month, paid in cash at the end of each month.

4. Sundry operating costs will be £20,000 per month and will be paid one month in arrears.

5. Fee income from clients will amount to £480,000 for the full year, based on a projection of sales of £40,000 per month. 25% of this will be paid in cash and the remaining 75% will be on account. Account customers will pay in the month following the sale.

6. Sophie will not be paid a salary but will withdraw £60,000 as Dividends half yearly in equal amounts.

Required:

1. Prepare a forecast cash flow statement for each of the 12 months of the year, and a summary for the year itself.

2. Write a letter to Sophie advising him on the benefits of preparing a monthly cash flow forecasts for his business. Use the figures from your cash flow forecast to give your recommendation

FINANCE SECTION

1. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur.

2. It is now September 15 2015. A Japan importer is going to pay 1 million US dollars in one month's time. The importer is worried that he will sustain a loss if the US dollar increases in value relative to the Japanese Yen.

The dollar future contracts on the Chicago Mercantile Exchange have future price of 180 Japanese Yen per US dollar on October 15 2015. One US dollar future contract is for 1 million US dollar.

a) Should the Japanese importer short or long the dollar future contract?

b) What is the importer's pay off on October 15 if the spot price is 170 Japanese Yen per US dollar?

c) What is the importer's pay off on October 15 if the spot price is 190 Japanese Yen per US dollar?

3. You purchased one Euro call option with an exercise price of £0.70/ € and a premium of £0.2.

In the following table, calculate and fill in your net profit or loss (remember to indicate whether your option is exercised or not)

Possible Spot Rate of  Euro on Expiration Date	Your Net Profit (Loss) per Unit if Spot Rate Occurs
£0.65
£0.67
£0.75

4. Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of curren¬cies in countries with relative higher inflation? Why the PPP may not hold?