Study Support Cash Management (CMGT) & Credit Management and Debt control (CRMC) Disclaimer Study Support materials comprise non live assessments that were created for the 2003/2006 standards and do not resemble assessments designed for the AAT Accountancy Qualification (launched July 2010). There are some topic similarities between the 2003/2006 standards and the AAT Accounting Qualification (launched July 2010). Practice assessments, guidance and standards for the AAT Accountancy Qualification (launched July 2010) can be found on the AAT website. The Association of Accounting Technicians

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Contents

• Simulation D2014 Data & Task Book Unit 15 Operating a Cash Management and Credit Control System (OCMC) 2003/2006 standards, expired 14/02/09

• Simulation D2014 Answer Booklet

Unit 15 Operating a Cash Management and Credit Control System (OCMC) 2003/2006 standards, expired 14/02/09

• Suggested Answers for D2014

Unit 15 Operating a Cash Management and Credit Control System (OCMC) 2003/2006 standards, expired 14/02/09

• Accounting Technician Magazine article

Preparing cash budgets for manufacturing organisations

Simulation D2014 Data & Task Book Unit 15 Operating a Cash Management and a Credit Control System (OCMC) Source: 2003/2006 standards simulation D2014, expired 14/02/09AAT Level 4 Technician Pathway/Diploma Pathway (2003/2006 standards)

Data and tasks Instructions This simulation is designed to let you show your ability to operate a cash management and credit control system. You should read the whole simulation before you start work, so that you are fully aware of what you will have to do. You are allowed four hours to complete all tasks. You should spend two hours on Tasks 1, 2 and 3, and two hours on tasks 4–9. Write your answers in the answer booklet provided. If you need more paper for your answers, ask the person in charge. You should write your answers in blue or black ink, not pencil. You may use correcting fluid, but in moderation. You should cross out your errors neatly. You may pull apart and rearrange your booklets if you wish to do so, but you must put them back in their original order before handing them in. Your work must be accurate, so check your work carefully before handing it in. You are not allowed to refer to any unauthorised material, such as books or notes, while you are working on the simulation. If you have any such material with you, you must hand it to the person in charge before you start work. You may use a dictionary and a calculator. Any instances of misconduct will be reported to the AAT, and disciplinary action may be taken. Coverage of the standards of competence This simulation is designed to cover all standards of competence for this unit. However, if you have any questions or queries regarding this please contact your AAT Coordinator. The coverage of the standards of competence for this simulation is shown on page 3.

The situation Your name is Linda Buckley and you work as an Accounting Technician at GPP Limited (GPP). GPP is a manufacturer of navigation equipment. The business operates from premises on the outskirts of Manchester and supplies to wholesalers/distributors and also directly to major retailers. The business has three products (handheld navigation, in car navigation and marine navigation). GPP was established in 2004 and has seen rapid growth in turnover. The business was set up with the aid of venture capital in the form of a large loan and some equity. The Venture Capital Company (VC) agreed to provide the investment in three instalments. The final instalment of £2.5 million is due to be received in February 2007. The management team consists of the Managing Director Bill Paxton, an engineer who designed the product, Colin Green, Finance Director, and Linda Billing, Marketing Director. Bill owns 55 per cent, Linda 20 per cent and VC 25 per cent of the company. The business has struggled to meet customer demand in the peak period for sales due to a shortage of skilled staff, and has incurred large overtime payments. The business has an overdraft facility of £200,000. Personnel Yourself, Linda Buckley Accounting Technician Jennie Brooks Accounting Assistant Mark Davies Credit Controller Colin Green Finance Director Bill Paxton Chairman and Managing Director Linda Billing Marketing Director

Tasks to be completed Tasks 1 to 3 are based upon the situation on page 5. Task 1 Today’s date is 30 June 2006 for completion of Task 1. Colin Green has asked you to prepare the following information: a) a cash flow forecast for the period July 2006 to December 2006. Refer to the information on pages 9–12 of this booklet, and use the pro forma on page 3 of the answer booklet. (You may use page 4 of the answer booklet for rough work.) b) a brief explanation of how the budgeted cash flow deficit could be financed. Use page 5 of the answer booklet for your answer. Task 2 Today’s date is 5 January 2007 for completion of Task 2. The company agreed a short term overdraft facility of £2 million to cover the cash deficit during October to December, to be repaid in January after the Christmas trading. On pages 13–14 of this booklet you have been provided with information on the sales and the actual cash receipts by Jennie Brooks, and credit control information by Mark Davies. Based on this information you have been asked to: a) prepare a statement comparing budgeted cash flow with actual cash flow for the six months ended 31 December 2006 and identify any variances (you do not need to reconcile for each month) b) suggest possible explanations for the significant variances found and state what action could have been taken to avoid these variances. Specifically comment on the action which may have avoided the loss on Doxons plc’s account c) comment on whether the company will have sufficient cash receipts in January to repay the overdraft facility. Use pages 6–8 of the answer booklet. Task 3 Bill Paxton is investigating the purchase of a factory in Poland in order to increase capacity and reduce labour costs. The purchase price of the factory is £1 million. Bill would like you to prepare a brief report, outlining the advantages and disadvantages of the following ways the business could finance the factory, and making a recommendation. 1) Long term bank loan 2) Invoice discounting/factoring 3) Bank overdraft Draft a report to Bill Paxton on pages 9–10 of the answer booklet.

The remaining tasks are stand alone and are not based on the situation on page 5. Task 4 Based on the information on page 15 of this booklet: a) explain briefly what is meant by seasonal variation b) calculate the seasonal variation for each month of 2005 for BB Limited c) calculate a forecast for the first half of 2006 (January to June) for BB Limited. Use pages 11–12 of the answer booklet for your answer. Task 5 Discount for prompt payment Company A is considering giving discounts for prompt payment from customers. The average customer invoice is £2,500 and normal terms of trade are 30 days from the invoice date. The company is considering giving a two per cent discount for payment within seven days of the invoice date.

• Calculate the annual percentage cost of this discount, using pages 13–14 of the answer booklet. Task 6

• Compare the risk and reward characteristics of placing money into a deposit account with those of an investment in shares.

Use pages 15–16 of the answer booklet. Task 7 You work as a senior underwriter for a credit insurance company and have been asked to provide a limit of £150,000 for a supplier to Tides Limited. Tides Limited manufactures diesel engines for use in speed boats. The business has been loss making for several years, but has recently appointed new management who have been reorganising the business to reduce the overheads. The business sold some surplus land in the period, making profit on disposal of £2 million. On page 16 of this booklet you have been given the past two years of statutory accounts for Tides Limited together with a forecast profit and loss account and balance sheet for 2006. a) Prepare a report on pages 17–18 of the answer booklet, making a recommendation as to whether the credit limit should be given. You should use appropriate ratios to support your recommendation. Use pages 19–20 of the answer booklet for your answers to parts b) and c). b) What are the limitations of the data provided for Tides Limited? c) How should a refusal of credit be communicated to a customer?

Task 8 You work as an accounting technician for Incom Limited. Using the information on page 17 of this question booklet, write a report to Mike Jones, the Finance Director of Incom Limited, covering the following points: a) a review of the credit control policy, explaining the weaknesses of the policy and suggesting how this could be improved b) an explanation of the debt collection action that needs to be taken for the accounts listed in the aged debtor report. Use pages 21–22 of the answer booklet. Task 9 How is the management of cash balances in public sector organisations different from private sector organisations? Use page 23 of the answer booklet.

Information for Task 4 BB Limited You have been provided with extracts from the monthly profit and loss account and information on the underlying trend.

Jan-05 Feb-05 Mar-05 Apr-05

£ £ £ £

Turnover 17,500 14,000 15,000 16,500

Cost of sales 14,000 11,200 12,000 13,200

Profit 3,500 2,800 3,000 3,300

Underlying trend 15,000 15,225 15,450 15,675

May-05 Jun-05 Jul-05 Aug-05

£ £ £ £

Turnover 16,900 17,000 18,000 14,000

Cost of sales 13,520 13,600 14,400 11,200

Profit 3,380 3,400 3,600 2,800

Underlying trend 15,900 16,125 16,350 16,575

Sep-05 Oct-05 Nov-05 Dec-05

£ £ £ £

Turnover 13,950 17,000 17,000 18,000

Cost of sales 11,160 13,600 13,600 14,400

Profit 2,790 3,400 3,400 3,600

Underlying trend 16,800 17,025 17,250 17,475

Simulation D2014 Answer Book Unit 15 Operating a Cash Management and a Credit Control System (OCMC) Source: 2003/2006 standards simulation D2014, expired 14/02/09AAT Level 4 Technician Pathway/Diploma Pathway (2003/2006 standards)

Simulation D2014 Suggested Answers Unit 15 Operating a Cash Management and a Credit Control System (OCMC) Source: 2003/2006 standards simulation D2014, expired 14/02/09AAT Level 4 Technician Pathway/Diploma Pathway (2003/2006 standards)

Accounting Technician Magazine article