c) What is a factoring Agency? (2 marks)

d) Discuss ONE (1) merit and ONE (1) demerit of engaging the services of a debt factoring agency. (3 marks)

Pee Ltd has been factoring its debtors for the past 5 years. The factor charges a fee of 2% and will lend up to 80% of the volume of debtors purchases for an additional ¾% per month. The firm typically has sales of GH¢500,000 per month, 70% of which are on credit. By using the factor, two savings are effected:

• GH¢2,000 per month that would be required to support a credit department, and
• A bad-debt expense of 1% on credit sales.

Pee Ltd’s bank has recently offered to lend it up to 80% of the face value of the debtors shown on the schedule of accounts. The bank would charge 8% per annum interest plus a 2% processing charge per GH¢1 of debtors lending. The firm extends terms of net 30, and all customers who pay their bills do so by the thirtieth of the month.

Required:
If the firm borrows on the average GH¢100,000 per month on its debtors, advice whether the firm should discontinue its factoring arrangement in favour of the bank’s offer?    (14 marks)

Innovate Ghana Ltd is a dealer in household consumables in Ghana. It currently sells on only cash basis. The company’s current annual sales are GH¢10 million. The operating cost structure is as follows:

• Cost of sales 55% of sales
• Staff cost 10% of sales
• Marketing and distribution cost 15% of sales

Management in a meeting concluded that introducing credit sales will help boost sales in the light of the current tightness in liquidity in the market, the drive by other competitors, and pressure from the sales team.

It is projected that total sales will grow by 50% solely from the credit sales. The customers are offered 1-month credit and a new credit department is set up to assess and monitor this credit sales. The monthly cost of running this credit department is GH¢20,000 and bad debts is expected to be 4% of the credit sales.

To finance this credit, Innovate Ghana Ltd will borrow at an interest rate of 25% per annum.

Required:
i) Calculate the total profit before tax before the introduction of the new policy. (4 marks)

ii) Calculate the total profit before tax after the introduction of the new policy. (6 marks)

iii) Advise management whether the initiative should be undertaken. (3 marks)

Taaba Oil Ghana Ltd is an Oil Marketing Company operating in the downstream Sector of the Oil and Gas industry in Ghana. The company initially was offering 4 weeks credit to its retailers until it changed it strategy to reduce the credit period from 4 weeks to 2 weeks to manage down it financing cost and bad debt.

Under the 4 weeks credit regime, annual credit sales was 500 million liters. The profit made per litre before financing charge and bad debt was GH¢0.20 (Twenty pesewas). The total working capital was GH¢250m but 50% was funded through trade credit and the remaining 50% was through Bank Overdraft at an interest rate 25% per annum. The cost of trade credit was already factored in the margin. Bad debt was at GH¢ 0.01 (one pesewa per litre) of the credit sales.

The change in policy from 4 weeks to 2 weeks was done immediately without prior advance discussion and notice period granted to retailers who were also selling on credit to their customers.

After operating the new credit policy, the volume of sales was negatively impacted as sales volume per annum dropped by 25% and bad debts increased by 100% due to pressure on the working capital of the retailers.As the new Finance Manager for Taaba Oil Ghana Ltd, you are tasked to review this policy.

Required:
i) Calculate the profit under the old policy.                                                                                                 (4 marks)

ii) Calculate the profit under the new policy.                                                                                              (4 marks)

iii) Based on your calculations above, advise management whether to revert to the old policy or maintain the new policy. (1 mark)

a) Lisa-Joys Company has annual credit sales of GH¢1,000,000. Credit customers take 45 days to pay. Bad debts are 2% of sales. The company finances its trade receivables with a bank overdraft, on which interest is payable at an annual rate of 15%.

A factor has offered to take over administration of the receivables ledger and collections for a fee of 2.5% of the credit sales. This will be a non-recourse factoring service. It has also guaranteed to reduce the payment period to 30 days. It will provide finance for 80% of the trade receivables, at an interest cost of 8% per year.

Lisa-Joys Company estimates that by using the factor, it will save administration costs of GH¢8,000 per year.
Required:
What would be the effect on annual profits if Lisa-Joys Company decides to use the factor’s services? (Assume a 365-day year).                                                                                                                                                                             (9 marks)

b) The need for working capital management vary from industry to industry, and they can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due accounts receivable, and in some instances, capital-raising efforts a company is undertaking. Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business.
Required:
Explain FOUR (4) advantages a company may derive from proper working capital management.                                  (6 marks)

Kankam Ghana Ltd currently operates a long working capital cash cycle. Management is considering an initiative to reduce the cash cycle in order to manage the size and cost of the company’s working capital. Below are the components of working capital under the existing policy.
.                                                     Existing
.                                                       GH¢
Cash                                           1,000,000
Debtors                                       4,000,000
Inventory                                    6,000,000
Creditors                                     4,000,000

Under the proposed policy or initiative,

• Cash is expected to increase by 50%
• Debtors is expected to reduce by 25%
• Creditors is expected to increase by 25%
• Current ratio is expected to be 1.9 times.

The cost of funds to the company is 20% per annum.
Required:
a) Calculate the company’s net working capital under existing and proposed policies.                                                   (5 marks)

b) Compute the change in the company’s working capital financing cost if the new policy is implemented. Advise management on whether to implement the new policy.                                                                                                               (3 marks)

c) Explain the importance of the cash conversion cycle in ascertaining the working capital needs of the company.        (4 marks)

d) Explain THREE (3) advantages to be derived from effective management of Accounts Receivable.                         (3 marks)

Adjaye Ltd has current sales of GH¢1.5m per year. Cost of sales is 75 per cent of sales and bad debts are one per cent of sales. Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs, while the company’s required rate of return is 12 per cent. Adjaye Ltd currently allows customers 30 days credit, but is considering increasing this to 60 days credit in order to increase sales.

It has been estimated that this change in policy will increase sales by 15 per cent and bad debts will increase from one per cent to four per cent. It is not expected that the policy change will result in an increase in fixed costs and creditors and stock will be unchanged.

Required:
Advice whether Adjaye Ltd should introduce the proposed policy. Support your answer with relevant computations.  (15 marks)

a) Factoring and Invoice Discounting are both financial services that can release the funds tied up in your unpaid invoices, involving a provider who agrees to advance money against outstanding debtor balances. However, factoring is not the same as invoice discounting.
Required:
Differentiate between factoring and invoice discounting.                                                                                          (5 marks)

b) ATA Ghana Ltd is a Company in Ghana engaged in the trading of commodities. The annual sales are at GH¢ 24 million. The average age of debtors is one month and the percentage of bad debts is 1%.

A new Marketing Director has been hired by the Company to improve its sales. The new Marketing Director proposed that sales could be increased up to GH¢ 30 million if new customers were taken on. Taking on new customers will lengthen the average credit period to 2 months and increase bad debts to 1.5% of sales.

The Finance Manager provided that, variable cost is 70% of the selling price and the Company’s cost of capital is 20%.
Required:
Advise whether the Company should take on the new customers.                                                                                  (10 marks)

Zeb Limited offers 2 percent discount to its customers who pay within ten (10) days. The company normally collects its debt within thirty (30) days. Assume 365 days in a year.
Required:
Determine the cost of the discount to the company                                                                                                            (3 marks)

a) Explain THREE causes each of the following situations;
i) Overcapitalised                                                                              (3 marks)

ii) Overtrading                                                                                   (3 marks)

b) The liberalization of the downstream Oil and Gas sector in Ghana has created intense competition among the oil marketing companies. SAP Petroleum Ltd is considering relaxing its tight credit policy to boost sales in the light of the current market development. The change in policy will result in an increase in average collection period from 30 days (1 month) to 60 days (2 months). The review in credit policy is expected to increase sales in each year amounting to 25% of the current sales volume.
Selling price per litre                              GH¢ 30
Variable cost per litre                             GH¢ 27
Current annual sales                              GH¢ 6,000,000

The required rate of return on investment is 28%. The 25% increase in sales will result in additional stock level of GH¢250,000 and additional accounts payable of GH¢ 50,000.

Required:
Provide your expert advise on whether to extend or not to extend period to customers if:
i) All the customers take the longer credit of 2 months.                                                                                                  (5 marks)

ii) Existing customers do not change their payment terms and only the new ones did?                                                  (4 marks)