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    ACT 205 Zee

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    It is about principle of accounting

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    ACT 205 Zee

    Uploaded by

    r063plio9a
    4 views6 pages
    It is about principle of accounting

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    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    It is about principle of accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views6 pages

    ACT 205 Zee

    Uploaded by

    r063plio9a
    It is about principle of accounting

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    NAME

    ADMISSION NO.

    DEPARTMENT

    COURSE TITLE: INTRODUCTION TO FINANCE

    COURSE CODE: ACT 205

    DECMEBER, 2023
    QUESTION 1

    Financial forecasting utilizes historical data and analytical techniques to predict future financial
    performance. It's akin to peering into a crystal ball, helping businesses anticipate challenges,
    capitalize on opportunities, and make informed decisions for long-term sustainability.

    Why is it Important for Going Concern Assessment

    The "going concern" assumption underpins financial reporting. It implies that a corporation
    will continue operating for the foreseeable future, allowing its financial statements to be
    presented on a "going concern" basis. Financial forecasting plays a vital role in this assessment
    by providing insights into:

    • Future profitability and cash flow: Can the corporation generate sufficient revenue
    and cash to meet its obligations in the coming years?

    • Debt repayment ability: Will the corporation be able to manage its debt burden and
    avoid defaulting on loans?

    • Liquidity and solvency: Does the corporation have enough readily available assets to
    cover its short-term liabilities?

    Methodologies for Forecasting Going Concern Status:

    There are various methodologies available, each with its strengths and limitations. Choosing
    the right method depends on the specific circumstances of the corporation and the desired level
    of detail. Here are some common techniques:

    • Trend Analysis: Extrapolating past trends into the future, assuming they will continue.
    Simple but effective for stable businesses.

    • Ratio Analysis: Evaluating key financial ratios like profitability, liquidity, and
    solvency to assess future performance.

    • Discounted Cash Flow (DCF) Analysis: Estimating the present value of future cash
    flows to determine the corporation's intrinsic value. More complex but insightful for
    long-term assessment.

    • Scenario Planning: Exploring different potential future scenarios based on various


    assumptions, such as economic changes or market disruptions. Helps prepare for
    uncertainties.
    Each of these techniques has its own strengths and weaknesses, and the choice of methodology
    will depend on the specific needs of the business.

    QUESTION 2

    Zee Fabrics Limited: Financial Forecasting for Growth

    1. Business Overview:

    Zee Fabrics Limited is a small business based in Lagos, Nigeria, specializing in the production
    of high-quality, locally-sourced fabrics. Founded in 2019, Zee Fabrics has garnered a loyal
    customer base by offering unique designs, competitive prices, and excellent customer service.

    Current financial status (2023):

    • Revenue: ₦4.5 million

    • Net Profit: ₦1.2 million

    • Growth Aspiration: Double revenue to ₦9 million by year-end 2024.

    2. Sales Forecast:

    Method: Trend Analysis with Seasonal Adjustment

    Based on historical sales data (2021-2023), Zee Fabrics has experienced a consistent annual
    growth rate of 25%. Considering seasonal fluctuations (increased demand during festive
    periods), we project the following sales revenue for 2024:

    Quarter Projected Sales (₦)

    Q1 ₦2.3 million

    Q2 ₦2.5 million

    Q3 ₦3.0 million
    Q4 ₦3.2 million

    Rationale:

    • 25% growth trend applied to each quarter's baseline (previous year's sales + seasonal
    adjustment).

    • Increased marketing efforts during Q4 (festive season) to capitalize on higher demand.

    The rationale is to create a realistic estimate that reflects both the business's current trajectory
    and its growth initiatives.

    3. Expense Projection:

    We account for any anticipated changes in costs due to expansion plans or market conditions.
    The goal is to create a comprehensive projection that allows the business to allocate resources
    efficiently while accounting for potential fluctuations in expenses.

    Fixed Costs:

    • Rent: ₦150,000 per month

    • Salaries: ₦400,000 per month

    • Utilities: ₦50,000 per month

    • Insurance: ₦25,000 per month

    Variable Costs:

    • Raw materials: 50% of sales revenue

    • Labor: 20% of sales revenue

    • Transportation: 5% of sales revenue

    4. Cash Flow Forecast:

    A simple cash flow forecast for next year (4 quarters) is prepared below, focusing on the timing
    of cash inflows and outflows. This forecast highlights potential periods of surplus or deficit,
    enabling Zee Fabrics to manage its liquidity effectively. By aligning cash flow with business
    activities, the company can make informed decisions about investments, working capital, and
    financing needs.
    Q1 Q2 Q3 Q4

    Beginning Cash ₦200,000 ₦150,000 ₦200,000

    Sales Revenue ₦2.3 million ₦2.5 million ₦3.0 million

    Total Inflows ₦2.5 million ₦2.65 million ₦3.2 million

    Fixed Costs ₦625,000 ₦625,000 ₦625,000

    Variable Costs ₦1.15 million ₦1.25 million ₦1.5 million

    Total Outflows ₦1.775 million ₦1.875 million ₦2.125 million

    Ending Cash ₦725,000 ₦775,000 ₦1.075 million

    Potential Surplus: Q3, Q4. Potential Deficit: Q1, Q2.

    5. Financial Risks:

    Risk 1: Raw material price fluctuations

    Rationale: Global economic factors and supply chain disruptions can lead to unpredictable
    increases in raw material costs, impacting profit margins.

    Mitigation Strategy:

    • Diversify suppliers to reduce dependence on single sources.

    • Negotiate long-term contracts with reliable suppliers.

    • Adjust pricing models to incorporate potential cost fluctuations.

    Risk 2: Increased competition from larger players


    Rationale: Entry of larger businesses offering similar products might attract customers and pose
    a threat to Zee Fabrics' market share.

    Mitigation Strategy:

    • Emphasize unique selling propositions (locally sourced, customized designs).

    • Invest in brand building and targeted marketing to differentiate Zee Fabrics.

    • Explore niche markets underserved by larger competitors.

    6. Recommendations:

    1. Secure additional funding: To overcome potential cash flow deficits in Q1 and Q2,
    consider seeking bank loans or small business grants.

    2. Implement inventory management system: Optimize raw material ordering to


    minimize holding costs and reduce risks associated with price fluctuations.

    3. Expand online presence: Establish a strong online store and leverage social media
    marketing to reach a wider customer base and boost sales.

    By implementing these recommendations and closely monitoring financial forecasts, Zee


    Fabrics can navigate potential risks and achieve its ambitious growth goals for 2024.

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