VCE Accounting Practice Exam 4
Cash Flow, Budgets and Financial Analysis
✎ Complete ALL questions on paper before reading the model answers below. No notes. Approximately 1 minute per mark. Model answers appear after the STOP divider.
SHORT ANSWER QUESTIONS (4 marks each)
Question 1 (4 marks)
Explain the difference between profit and cash flow. Why can a profitable business run out of cash?
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Question 2 (4 marks)
Describe the three sections of a cash flow statement with two examples each.
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Question 3 (4 marks)
Explain what a cash budget is and why it is important.
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Question 4 (4 marks)
Calculate four ratios: Net Sales $150K; COGS $90K; NP $18K; Total Assets $120K; OE $70K; CA $40K; CL $16K
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Question 5 (4 marks)
Explain operating vs investing cash flows. Why do investors focus on operating cash flow?
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Question 6 (4 marks)
Prepare cash budget for July:
Opening $8K; Cash sales $15K; Debtor collections $22K; Inventory $18K; Wages $9K; Rent $3K; Loan repayment $5K
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Question 7 (4 marks)
What is inventory turnover? Calculate: COGS $84K; Opening Inv $12K; Closing Inv $16K. Explain low ratio.
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Question 8 (4 marks)
Why might a business have net profit but negative operating cash flow?
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EXTENDED RESPONSE QUESTIONS
Extended Response 1: Cash Flow Analysis
Question 9 (5 marks)
Extended Response 1: Cash Flow Analysis (a)
Reconcile net profit to operating cash flow:
Net Profit $42K; Depreciation $6K; AR increased $25K; Inventory increased $15K
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Extended Response 1: Cash Flow Analysis
Question 10 (3 marks)
Extended Response 1: Cash Flow Analysis (b)
Three strategies to improve operating cash flow.
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Extended Response 2: Ratio Analysis
Question 11 (6 marks)
Extended Response 2: Ratio Analysis (a)
Calculate five ratios and assess: Net Sales $250K; COGS $160K; NP $22K; Total Assets $180K; OE $90K; CA $55K; CL $22K; Total Liab $90K; AR $48K
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Extended Response 2: Ratio Analysis
Question 12 (2 marks)
Extended Response 2: Ratio Analysis (b)
Explain four limitations of ratio analysis.
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▼ STOP — Complete ALL questions above before reading model answers below ▼
MODEL ANSWERS — SHORT ANSWER
✦ Model Answer – Question 1 (4 marks)
Profit (accrual): revenue earned – expenses incurred, regardless of cash timing. Cash flow: actual cash movements.
Why profitable but cash-poor: (1) Credit sales – revenue recognised but cash not received; (2) Inventory investment – cash paid before goods sold; (3) Capital expenditure – large cash outflows not immediately expensed; (4) Loan repayments – reduce cash but not profit; (5) Drawings – reduce cash without affecting profit.
✦ Model Answer – Question 2 (4 marks)
1. Operating: from trading. Inflows: cash from customers; other income. Outflows: cash to suppliers; wages, rent.
2. Investing: from buying/selling non-current assets. Inflows: sale of equipment; investments sold. Outflows: purchase of equipment; buildings.
3. Financing: from owner and lenders. Inflows: bank loans; capital contributions. Outflows: loan repayments; drawings.
✦ Model Answer – Question 3 (4 marks)
Cash budget: forward-looking plan estimating cash inflows and outflows over a future period. Structure: Opening balance + Inflows – Outflows = Closing balance.
Why important: (1) Liquidity management – identifies cash shortfalls in advance; (2) Plan capital expenditure timing; (3) Benchmark for comparing actual vs budgeted; (4) Required by lenders; (5) Early warning of insolvency risk.
✦ Model Answer – Question 4 (4 marks)
GPM = 40%; NPM = 12%; ROE = 25.7%; Current Ratio = 2.5:1. All indicate a well-performing, liquid business.
✦ Model Answer – Question 5 (4 marks)
Operating: from day-to-day trading – core business. Investing: long-term asset transactions. Investors focus on operating CF because: (1) Sustainable and recurring; (2) Quality of profit – if profit high but operating CF low, earnings quality is poor; (3) Self-funding capacity; (4) Dividend/drawings must come from cash.
✦ Model Answer – Question 6 (4 marks)
Opening $8,000
+ Cash Sales $15,000
+ Collections $22,000
= Total Inflows $37,000
– Inventory $18,000
– Wages $9,000
– Rent $3,000
– Loan $5,000
= Total Outflows $35,000
Net Cash Flow $2,000
Closing Balance $10,000
✦ Model Answer – Question 7 (4 marks)
IT = COGS / Avg Inventory = $84K / $14K = 6 times. Average holding = 61 days.
Low ratio indicates: slow-moving stock; overbuying; obsolescence risk; cash flow strain from excess inventory.
✦ Model Answer – Question 8 (4 marks)
1. Large increase in AR – credit sales earned but not yet collected. 2. Inventory increase – cash paid for stock not yet sold. 3. Decreased AP – paid suppliers faster than purchases incurred. Management should: accelerate debtor collection; reduce inventory; negotiate extended supplier terms.
MODEL ANSWERS — EXTENDED RESPONSE
✦ Model Answer – Question 9 (5 marks)
Net Profit: $42,000
+ Depreciation (non-cash): +$6,000
– Increase in AR: -$25,000
– Increase in Inventory: -$15,000
Operating Cash Flow: $8,000 ✓
Explanation: of $42K profit only $8K reached as cash – $25K not yet collected; $15K paid for unsold stock; depreciation adds back (no cash).
✦ Model Answer – Question 10 (3 marks)
1. Tighten debtor collection – reduce terms; offer discounts; follow up overdue accounts.
2. Reduce inventory holding – JIT; reduce reorder quantities; discount slow-moving lines.
3. Extend AP terms – negotiate longer supplier payment without penalty.
✦ Model Answer – Question 11 (6 marks)
GPM=36%; NPM=8.8%; ROE=24.4%; Current Ratio=2.5:1; Debt Ratio=50%; DCP=70 days.
Overall: profitable (strong GPM and ROE); liquid (2.5:1); moderate leverage. Main concern: debtors taking 70 days – if 30-day terms, significant cash flow issue requiring urgent attention.
✦ Model Answer – Question 12 (2 marks)
1. Historical – shows past, not future. 2. No context – meaningless without benchmark. 3. Different accounting policies – limits comparability. 4. Non-financial factors ignored – brand, staff, customer loyalty not captured.
