Unit 01 · Practice solutions

Practice solutions

Finance, the Firm, and the Statements · Ghana · GH₵

Worked answers to the optional practice questions. The required question is turned in to the TAs, and its answer is not published here.

Open. Expect: classroom buildings (produce teaching capacity), school buses (allow students to attend from further away, expanding the fee base), textbooks and laboratory equipment (support the fee level charged), IT systems (administration and fee collection), land (capacity for future expansion). Mark for whether each item is paired with what it produces, not just named.
Cost of capital = 12,000,000 × 16% = GH₵1,920,000 per year. The line produces GH₵1,900,000. Value destroyed = GH₵20,000 per year. Reject — though the margin is so thin that the recommendation should be presented as "this project roughly breaks even and does not clear its hurdle," not as a confident rejection.
Break-even is GH₵1,920,000. The estimate would need to be wrong by 20,000 / 1,900,000 = 1.05% for the recommendation to flip. That is far inside any reasonable estimation error, which is the real finding: the analysis cannot distinguish this project from break-even.

(a) Balance sheet only — cash up, receivables down. Cash-flow statement, operating. No income statement effect; the revenue was recognised two months ago. (b) Balance sheet — inventory up, payables up. Cash-flow statement, operating, but net zero this period. No income statement effect until sold. (c) Balance sheet — cash down, debt down. Cash-flow statement, financing. No income statement effect — principal is not an expense. (d) Balance sheet — cash up, equity up. Cash-flow statement, financing. No income statement effect. (e) Income statement — bad-debt expense GH₵80,000. Balance sheet — receivables down. No cash movement.
Yes, it compares a stock (receivables at one date) with a flow (revenue over twelve months). It is still useful — this is exactly how the collection-period ratio works — provided you interpret it correctly. It does not mean "23% of revenue is uncollected"; it means the receivables balance is equivalent to about 23% of a year's revenue, or roughly 84 days of sales.
Buying an asset is not an expense. In the year of purchase, the income statement shows nothing at all — the transaction is a swap of cash for equipment on the balance sheet, and appears in investing activities on the cash-flow statement. In each subsequent year, a portion of the GH₵900,000 is charged as depreciation, spreading the cost across the years the van is used. Cash pain now, accounting pain later.

Gross: for every GH₵100 of sales, GH₵40 remains after the direct cost of what was sold, and all overheads, interest and tax come out of that GH₵40. Operating: after running the whole business, GH₵12.90 of every GH₵100 survives. Net: after the lenders and the government, the owners keep GH₵7 of every GH₵100 sold.
Company A sells at a high mark-up but spends heavily below the gross line — likely marketing, staff, premises, or research; think branded consumer goods or specialist services. Company B operates on thin mark-ups with a very lean cost structure and probably high volume — think distribution or commodity trading. A's greater risk is that its overhead is largely fixed, so a fall in volume hits profit hard. B's greater risk is that a small increase in input cost it cannot pass on wipes out most of its margin.
Pretax 4.0 − 2.0 = GH₵2.0M. Tax GH₵0.5M. Net income GH₵1.5M. Net margin 1.9%. Net income falls from 2.10 to 1.50, a fall of 28.6%. Operating income fell 0%. The whole decline came from below the operating line — the business performed identically and the owners earned nearly a third less, because a fixed financing cost sits between operating income and them. This is financial leverage, and it works in both directions.

Closing PP&E = Opening + Capex − Depreciation, so Capex = 29 − 24 + 4 = GH₵9 million. Reasoning: depreciation was pushing the balance down by GH₵4M all year, so to finish GH₵5M higher the company must have added GH₵9M.
15.0 + 2.4 − Dividends = 16.1, so dividends = GH₵1.3 million.
9 − 14 + 6 = GH₵1 million, and cash rose by GH₵1 million. It reconciles; there is no error.

(1) Credit sales — revenue recorded before cash is collected. (2) Inventory — cash paid before the cost reaches the income statement. (3) Capital spending — cash paid years before depreciation is charged. (4) Borrowing and repayment — cash in with no income, cash out with no expense. Examples open; mark for whether the timing direction is right.
4.5 / 24.0 × 365 = 68.4 days. At 45 days, receivables would be 24.0 × 45/365 = GH₵2.96M, releasing GH₵1.54 million of cash.
Increase in receivables becomes 16.0 − 7.4 = GH₵8.6M. Operating cash flow = 2.10 + 1.50 − 8.60 − 3.70 + 1.90 = negative GH₵6.8 million. Collection period = 16.0 / 80.0 × 365 = 73 days.
It might work: stretching payables is genuinely free financing if suppliers do not charge for it, and Adom's payment period is shorter than its collection period, so there is room. It might make things worse: farms selling perishable produce have weak balance sheets and may simply refuse to supply, or may raise prices to compensate — and losing supply reliability in fresh produce damages the customer relationships that are the company's main asset. Note also that this treats the symptom; the collections and stock problem is the cause.