Page 13 - CIMA OCS August 2018 Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Question Response

Why had turnover Reasons given in pre-seen:
increased in 2018? • Very few except that TFT has an excellent brand name supported
by distinctive blends.
• Main growth areas identified as green teas and infusions but TFT
has been losing market share in both of these.
Other possible reasons
• Change in mix towards more expensive lines
• Price increases (unsure if any real growth in sales – i.e. above
inflation)

Comment on the • COS increased by less than revenue (3.6% v 5.4%), which is
increase in cost of sales expected as the presence of fixed costs within COS normally
between 207 and 18 results in COS changing by less than revenue.

Had the working capital Positives
position worsened or • Both inventory and receivables days stable
improved? Explain.
Negatives
• Overall operating cycle has lengthened
• Receivables days figure seems very high – why are we allowing
customers to take 103 days (on average!) when the specified
terms are 30 days?
• Overall, an additionalD$3.5m tied up in working capital

Comment on Thomas • Bank loan reduced by D$1m from 3.5m to 2.5m
Fine Teas’ gearing. • Overall level of gearing very low
• Should give scope to raise funds via debt if required

Comment on Thomas Positives
Fine Teas’ cash flow. • Cash generated from operations > D$21m
• D$1.4m more cash at the end of 2017
• Able to pay tax of D$6.7m, a dividend of D$10.5m, invest an
additional D$1.5m in NCAs and still have a positive cash flow

Negatives
• An extra D$3.5m tied up in working capital
• Is the payment of D$10.5m dividend sustainable?

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