a. What is financial risk? (1 mark) b. What factors may affect the type and extent of an organisation’s exposure to financial risks?
ASSESSMENT 1
Course Name FNS60215
Advanced Diploma of Accounting
Subject/module Financial Risk
Assessment method Part A – Written Questions
Part B – Case Study
Weighting 50%
Units of Competency FNSACC609
Evaluate Financial Risk
Instructions
1. Assessments should be completed as per your trainer’s instructions.
2. Assessments must be submitted by the due date to avoid a late submission penalty.
3. Plagiarism is copying someone else’s work and submitting it as your own. You must write your answers in your own words and include a reference list. A mark of zero will be given for any assessment or part of an assessment that has been plagiarised.
4. You may discuss your assessments with other students, but submitting identical answers to other students will result in a failing grade. Your answers must be yours alone.
5. Your trainer will advise whether the assessment should be digitally uploaded or submitted in hard copy. Assessments that are digitally uploaded should be saved in pdf format.
6. You must attempt all questions.
7. You must pass all assessments in order to pass the subject.
8. All assessments are to be completed in accordance with WHS regulatory requirements.
Assessment 1 Part A – Written or Oral Questions
1. a. What is financial risk? (1 mark) b. What factors may affect the type and extent of an organisation’s exposure to financial risks? (3 marks)
c. List and describe THREE possible financial risks an organisation may
face. (9 marks)
2. a. What is liquidity risk? (1 marks)
b. List and explain ONE method you may use to measure the organisation’s
exposure to liquidity risk. (3 marks) c. Describe ONE method you may use to manage the liquidity risk. (4 marks)
3. List and describe THREE ratios you may use to determine effects on liquidity.
(9 marks)
4. The days in inventory ratio and days’ sales in receivables for XYZ Pty Ltd is calculated and provided as below:
XYZ Pty Ltd’s ratios Industry average
Days in inventory 72 days 15 days
Days’ sales in receivables 40 days 20 days
Assume that you are the director of XYZ Pty Ltd, what will the above ratios tell you in regards to magnitude and volatility of organisational risks to
determine extent of risk exposure? What actions may you take to reduce the
organisation’s exposure to risk? (6 marks)
5. There are several ways organisations store, record and update financial information and data. They include manual systems (hard copy) and
computer-based (electronic) systems. How do computer and manual
systems operate? (6 marks)
6. Why is it important for an organisation to have an effective internal control in relation to financial risk measurement and management? (5 marks)
7. What is working capital? What does the management of working capital involves? Why is it important for an organisation to have an effective and
efficient working capital management? (6 marks)
8. In order to develop risk management strategies, it is very important to assess financial risk exposure in the early stages of the process. What are
the factors that may affect the risk assessment? (6 marks)
Part A Total Marks: 59
Assessment 1 Part B – Case Study
Assess Financial Risk Exposure and Working Capital
Management
Company A
You are given the financial statements of Company A as follow:
Company A
Comparative Income Statement
For the years ended 30 June 2015 and 2014
2015 2014
Net sales $940,000 $765,000
Cost of sales $450,000 $380,000
Gross profit $490,000 $385,000
Expenses:
Selling expenses $180,000 $155,000
General expenses $155,000 $130,000
Interest expense $50,000 $30,000
Total expenses $385,000 $315,000
Profit before income tax $105,000 $70,000
Less: Income tax expense $32,000 $21,000
Profit $73,000 $49,000
Company A
Comparative Balance Sheet
For the years ended 30 June 2015 and 2014
2015 2014
Assets
Current assets:
Cash $40,000 $55,000
Accounts receivable (net) $150,000 $100,000
Inventory $120,000 $110,000
Non-current assets:
Long-term investments $35,000 $10,000
Property, plant and equipment (net) $605,000 $420,000
Total assets $950,000 $695,000
Liabilities
Current liabilities:
Accounts payable $75,000 $56,000
Accrued liabilities $25,000 $38,000
Loans payable $50,000 $30,000
Non-current liabilities:
Long-term loans payable $350,000 $200,000
Total liabilities $500,000 $324,000
Net assets $450,000 $371,000
Equity
Share capital $200,000 $200,000
Retained earnings $250,000 $171,000
Total equity $450,000 $371,000
The industry average for the following ratios are assumed and provided as below.
Ratios Industry average
Days in inventory 20 days
Days’ sales in receivables 25 days
Debt to equity ratio 2.00
Current ratio 2.90
Times-interest-earned ratio 2.00
The majority (90%) of its client’s base is from overseas which will pay US dollars for the products provided by the Company A.
Required: Based on the nature of business operation and financial histories, identify and determine extent of Company A’s financial risk exposures. (38 marks)
Company B
You are given the following information for Company B as below.
2015 2014
Cash and marketable securities $805,000 $700,000
Account receivable $6,506,000 $6,403,000
Inventories $12,940,000 $11,350,000
Accounts payable $9,500,000 $8,900,000
Required:
1. Assume that cash and marketable securities are part of the firm’s operating current assets, calculate the operating working net working capital for both 2015 and 2014 based on the information above. (6 marks)
2. Assume that the sales for 2015 and 2014 are $33,596,875 and $36,742,308 respectively, calculate operating working capital turnover ratio for both year.
(4 marks)
3. You are also given the following ratios used in working capital management for Company B:
Ratios 2015 2014
Accounts receivable turnover 22.50 35.60
Inventory turnover 1.20 1.80
Accounts payable turnover 6.50 9.31
Days receivable 16.22 10.11
Days inventory 304.17 202.78
Days payable 56.15 39.20
Based on the ratios in Part 2 and 3, do you think Company B has a good working capital management? Why or why not? (10 marks)
Part B Total Marks: 58
Total Marks Assessment 1: 117
Course Name FNS60215
Advanced Diploma of Accounting
Subject/module Financial Risk
Assessment method Part A – Written Questions
Part B – Case Study
Weighting 50%
Units of Competency FNSACC609
Evaluate Financial Risk
Instructions
1. Assessments should be completed as per your trainer’s instructions.
2. Assessments must be submitted by the due date to avoid a late submission penalty.
3. Plagiarism is copying someone else’s work and submitting it as your own. You must write your answers in your own words and include a reference list. A mark of zero will be given for any assessment or part of an assessment that has been plagiarised.
4. You may discuss your assessments with other students, but submitting identical answers to other students will result in a failing grade. Your answers must be yours alone.
5. Your trainer will advise whether the assessment should be digitally uploaded or submitted in hard copy. Assessments that are digitally uploaded should be saved in pdf format.
6. You must attempt all questions.
7. You must pass all assessments in order to pass the subject.
8. All assessments are to be completed in accordance with WHS regulatory requirements.
Assessment 1 Part A – Written or Oral Questions
1. a. What is financial risk? (1 mark) b. What factors may affect the type and extent of an organisation’s exposure to financial risks? (3 marks)
c. List and describe THREE possible financial risks an organisation may
face. (9 marks)
2. a. What is liquidity risk? (1 marks)
b. List and explain ONE method you may use to measure the organisation’s
exposure to liquidity risk. (3 marks) c. Describe ONE method you may use to manage the liquidity risk. (4 marks)
3. List and describe THREE ratios you may use to determine effects on liquidity.
(9 marks)
4. The days in inventory ratio and days’ sales in receivables for XYZ Pty Ltd is calculated and provided as below:
XYZ Pty Ltd’s ratios Industry average
Days in inventory 72 days 15 days
Days’ sales in receivables 40 days 20 days
Assume that you are the director of XYZ Pty Ltd, what will the above ratios tell you in regards to magnitude and volatility of organisational risks to
determine extent of risk exposure? What actions may you take to reduce the
organisation’s exposure to risk? (6 marks)
5. There are several ways organisations store, record and update financial information and data. They include manual systems (hard copy) and
computer-based (electronic) systems. How do computer and manual
systems operate? (6 marks)
6. Why is it important for an organisation to have an effective internal control in relation to financial risk measurement and management? (5 marks)
7. What is working capital? What does the management of working capital involves? Why is it important for an organisation to have an effective and
efficient working capital management? (6 marks)
8. In order to develop risk management strategies, it is very important to assess financial risk exposure in the early stages of the process. What are
the factors that may affect the risk assessment? (6 marks)
Part A Total Marks: 59
Assessment 1 Part B – Case Study
Assess Financial Risk Exposure and Working Capital
Management
Company A
You are given the financial statements of Company A as follow:
Company A
Comparative Income Statement
For the years ended 30 June 2015 and 2014
2015 2014
Net sales $940,000 $765,000
Cost of sales $450,000 $380,000
Gross profit $490,000 $385,000
Expenses:
Selling expenses $180,000 $155,000
General expenses $155,000 $130,000
Interest expense $50,000 $30,000
Total expenses $385,000 $315,000
Profit before income tax $105,000 $70,000
Less: Income tax expense $32,000 $21,000
Profit $73,000 $49,000
Company A
Comparative Balance Sheet
For the years ended 30 June 2015 and 2014
2015 2014
Assets
Current assets:
Cash $40,000 $55,000
Accounts receivable (net) $150,000 $100,000
Inventory $120,000 $110,000
Non-current assets:
Long-term investments $35,000 $10,000
Property, plant and equipment (net) $605,000 $420,000
Total assets $950,000 $695,000
Liabilities
Current liabilities:
Accounts payable $75,000 $56,000
Accrued liabilities $25,000 $38,000
Loans payable $50,000 $30,000
Non-current liabilities:
Long-term loans payable $350,000 $200,000
Total liabilities $500,000 $324,000
Net assets $450,000 $371,000
Equity
Share capital $200,000 $200,000
Retained earnings $250,000 $171,000
Total equity $450,000 $371,000
The industry average for the following ratios are assumed and provided as below.
Ratios Industry average
Days in inventory 20 days
Days’ sales in receivables 25 days
Debt to equity ratio 2.00
Current ratio 2.90
Times-interest-earned ratio 2.00
The majority (90%) of its client’s base is from overseas which will pay US dollars for the products provided by the Company A.
Required: Based on the nature of business operation and financial histories, identify and determine extent of Company A’s financial risk exposures. (38 marks)
Company B
You are given the following information for Company B as below.
2015 2014
Cash and marketable securities $805,000 $700,000
Account receivable $6,506,000 $6,403,000
Inventories $12,940,000 $11,350,000
Accounts payable $9,500,000 $8,900,000
Required:
1. Assume that cash and marketable securities are part of the firm’s operating current assets, calculate the operating working net working capital for both 2015 and 2014 based on the information above. (6 marks)
2. Assume that the sales for 2015 and 2014 are $33,596,875 and $36,742,308 respectively, calculate operating working capital turnover ratio for both year.
(4 marks)
3. You are also given the following ratios used in working capital management for Company B:
Ratios 2015 2014
Accounts receivable turnover 22.50 35.60
Inventory turnover 1.20 1.80
Accounts payable turnover 6.50 9.31
Days receivable 16.22 10.11
Days inventory 304.17 202.78
Days payable 56.15 39.20
Based on the ratios in Part 2 and 3, do you think Company B has a good working capital management? Why or why not? (10 marks)
Part B Total Marks: 58
Total Marks Assessment 1: 117
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