ACCA paper FFM foundation in financial management exam kit

SYLLABUS AND REVISION GUIDANCE SYLLABUS CONTENT Study Guide a Define working capital.[k] b Explain why working capital management is important.[k] c Explain the relationship between c

CERTIFIED ACCOUNTING TECHNICIAN

Paper FFM

Foundations in Financial

Management

EXAM KIT

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Published by Kaplan Publishing UK

Unit 2 The Business Centre

Molly Millar’s Lane

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RG41 2QZ

978-1-78740-062-7

© Kaplan Financial Limited, 2017

Printed and bound in Great Britain

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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

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

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

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INDEX TO QUESTIONS AND ANSWERS

Page number

MULTIPLE-CHOICE QUESTIONS (MCQs)

Cash receipts and payments 1 125

Cash balances and working capital management 4 127

Credit granting and debt collection 8 129

Sources of finance 12 131

Capital investments 20 135

June 2009 sample multiple-choice questions (published by ACCA) 25 137

June 2009 Exam Paper multiple-choice questions 28 138

December 2009 Exam Paper multiple-choice questions 30 138

Selected June 2010 Exam Paper multiple-choice questions 33 140

December 2010 Exam Paper multiple-choice questions 36 142

June 2012 Pilot Paper multiple-choice questions 39 143

19 Tastee Co (June 10 exam) 62 170

20 Joe (June 2012 Pilot Paper) 64 173

35 Expand Co (Dec 10 exam) 77 195

36 I Co (June 2012 Pilot Paper) 78 197

Credit granting and debt collection

43 Credit control policy (1) 82 207

44 Credit control policy (2) 83 208

70 Long term finance 98 244

71 Bake Co (Dec 10 exam) 99 246

72 Financial Intermediation (June 2012 Pilot Paper ) 99 248

73 L Co (June 2012 Pilot Paper – amended) 99 249

91 King Edward’s Hospital (June 10 exam) 121 273

92 Mr Food (Dec 10 exam) 122 276

93 Hockey Club (June 2012 Pilot Paper) 124 278

94 Capital budgeting 124 279

SYLLABUS AND

REVISION GUIDANCE

SYLLABUS CONTENT

Study Guide

(a) Define working capital.[k]

(b) Explain why working capital management is important.[k]

(c) Explain the relationship between cash flows and the working capital cycle.[s]

(d) Demonstrate the calculation of the working capital cycle (also known as the cash operating cycle) [s]

(e) Outline the possible relationships between inventory levels and sales.[s]

(f) Define and explain over-trading and over-capitalisation.[s]

(g) Identify and calculate over-trading and over-capitalisation financial indicators.[s]

(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)

(a) Explain the role of accounts payables in the working capital cycle.[k]

(b) Explain the role of accounts receivables in the working capital cycle.[k]

(c) Explain the need to monitor accounts payables.[s]

(d) Explain accounts payables control operations and the importance of accounts payables management.[s]

(e) Describe the various types and form of accounts payables.[k]

(f) Describe the various accounts payables payment methods and procedures (for example, direct debit, cheque).[s]

(g) Evaluate and demonstrate the issues involved with early payment and settlement discounts.[s]

(h) Identify the risks of taking increased credit and buying under extended credit terms.[s]

B CASH BUDGETING

(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]

(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]

(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]

(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]

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]

(i) Bank deposits

(ii) Certificates of deposit

(iii) Government stocks

(iv) Local authority bonds

(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]

(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]

(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]

D FINANCING DECISIONS

(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]

(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]

(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]

(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]

S YLL A BU S AN D RE VI SI ON G UI DA N CE

(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]

(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]

(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]

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

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

(e) Explain bankruptcy and insolvency.[k]

(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 worthiness of a customer.[k]

credit-(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 worthiness.[s]

(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]

(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]

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?

What do I need to cover during my 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

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

• 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

THE EXAM

FORMAT OF THE EXAMINATION

Two-hour written paper: Number of marks

Section A: 10 multiple-choice questions, worth 1, 2 or 3 marks each 20

Section B: 6 compulsory longer questions

Q2, 3 & 4 (10 marks each) 30

Q5 & 6 (15 marks each) 30

––––

Sitting the examination

Spend the first few minutes of the examination

reading the paper, deciding which question to

answer first

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.

Answering the questions

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

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

MATHEMATICAL TABLES

PRESENT VALUE TABLE

Present value of 1 i.e (1+r)–n

where r = discount rate

n = number of periods until payment

0.971 0.943 0.915 0.888 0.863

0.962 0.925 0.889 0.855 0.822

0.952 0.907 0.864 0.823 0.784

0.943 0.890 0.840 0.792 0.747

0.935 0.873 0.816 0.763 0.713

0.926 0.857 0.794 0.735 0.681

0.917 0.842 0.772 0.708 0.650

0.909 0.826 0.751 0.683 0.621

0.837 0.813 0.789 0.766 0.744

0.790 0.760 0.731 0.703 0.676

0.746 0.711 0.677 0.645 0.614

0.705 0.665 0.627 0.592 0.558

0.666 0.623 0.582 0.544 0.508

0.630 0.583 0.540 0.500 0.463

0.596 0.547 0.502 0.460 0.422

0.564 0.513 0.467 0.424 0.386

0.722 0.701 0.681 0.661 0.642

0.650 0.625 0.601 0.577 0.555

0.585 0.557 0.530 0.505 0.481

0.527 0.497 0.469 0.442 0.417

0.475 0.444 0.415 0.388 0.362

0.429 0.397 0.368 0.340 0.315

0.388 0.356 0.326 0.299 0.275

0.350 0.319 0.290 0.263 0.239

0.885 0.783 0.693 0.613 0.543

0.877 0.769 0.675 0.592 0.519

0.870 0.756 0.658 0.572 0.497

0.862 0.743 0.641 0.552 0.476

0.855 0.731 0.624 0.534 0.456

0.847 0.718 0.609 0.516 0.437

0.840 0.706 0.593 0.499 0.419

0.833 0.694 0.579 0.482 0.402

0.480 0.425 0.376 0.333 0.295

0.456 0.400 0.351 0.308 0.270

0.432 0.376 0.327 0.284 0.247

0.410 0.354 0.305 0.263 0.227

0.390 0.333 0.285 0.243 0.208

0.370 0.314 0.266 0.225 0.191

0.352 0.296 0.249 0.209 0.176

0.335 0.279 0.233 0.194 0.162

0.261 0.231 0.204 0.181 0.160

0.237 0.208 0.182 0.160 0.140

0.215 0.187 0.163 0.141 0.123

0.195 0.168 0.145 0.125 0.108

0.178 0.152 0.130 0.111 0.095

0.162 0.137 0.116 0.099 0.084

0.148 0.124 0.104 0.088 0.074

0.135 0.112 0.093 0.078 0.065

ANNUITY TABLE

Present value of an annuity of 1 i.e ( )

r

r+1

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

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

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

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

9.253 9.954 10.63 11.30 11.94

8.760 9.385 9.986 10.56 11.12

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

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

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

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

Section 1

MULTIPLE-CHOICE QUESTIONS

CASH RECEIPTS AND PAYMENTS

1 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)

2 Vincent is preparing a cash budget for July His credit sales are as follows

His recent debt collection experience has been as follows

Current month’s sales 20%

Prior month’s sales 60%

Sales two months prior 10%

Cash discounts taken 5%