CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - June 2003

Nomad Travels was expecting an inbound revenue of $1 million for the year 2002. ticketing commissions in the domestic industry were expected to be Rs.50 lakhs. Dollar rate for this purpose was assumed at Rs.50.

On the expense side Nomad Travel’s operating expenses were budgeted at Rs. 10 lakhs per month. On the inbound tour packages, Nomad Travels would typically spend 70% of the revenue on various costs including hotel, vehicle hire, domestic travel and miscellaneous items. Hotels would comprise half of this cost, vehicles 20%., domestic travel 20% and miscellaneous items 10%.

The first half year was expected to generate 25% of the revenue and the second half the balance (on the inbound tour activity). Domestic ticketing was expected to be uniform through out the year.

Nomad Travels pays income tax in four equal installments at 30% of their profit after considering export benefits. For the purpose of the tax working, profits would be considered as per latest actual data for each year and the latest budget available at that time.

Nomad Travels was considering buying an office for Rs.45 lakhs of which Rs.30 lakhs would be funded through a bank loan. This was to be effected on 1st July 2003. this loan would attract interest at 10% per annum and is payable quarterly. Repayment of this principal would be required to be effected every quarter end over a 5–year period.

Nomad Travel’s regular banking limits are Rs.100lakhs, carrying interest at 12%p.a. debited at the end of each quarter. Limits are generally utilized fully.
During the course of the year, various adverse factors affected the industry including the Iraq War and the SARS virus.

In the first half of the year, inbound traffic was down 20% and dollar rate was Rs.48. hotels reduced their rates by 10% due to low customer occupancy and Nomad Travels benefited to some extent. Other tour costs remained at budgeted levels. Operating costs, in fact, increased by 2%, due to understanding in December 2002. domestic air traffic activity remained at 3% above budget.

For the second half year, Nomad Travels is conservative about its projections now. It believes that revenue achievement on inbound traffic will be 80% of the original budget and domestic traffic will remain 3% above budget. Dollar rate would rise to Rs.49

Operating costs would increase by 3% over the original budget. Hotels would offer discounts of 10% of their earlier quoted levels, while other inbound costs would remain at budgeted levels.
The plan to buy the office would be implemented but on 1st October 2003.
You are required to present:

The gross profit margins in the customized machine sector are excellent at 60% of sales but orders are erratic, causing several working capital shortages. Operating costs were Rs.300 lakhs in half year I, but have been increasing at 5% per half year thereafter. These costs do not include bank interest.
Bank loans are currently Rs.200 lakhs, attracting 12% interest per annum.

Clients are expected to pay 5% upfront along with the order, 50% on inspection of the machinery (on completion of manufacture), 30% o installation (commissioning at the client’s premises) and the balance 15% after 1 year on successful operation of the machine. The time taken from negotiating the order to receiving the order is around 6 months, for manufacturing and inspection in 6 months, and for successful installation and commissioning is 6 months. Invoices are raised accordingly, based on work completed at each stage.

However, most clients do not adhere to the agreed schedules. While half of the customers pay in the same year as agreed, the other half typically delay it to the next half year. In 10% of the cases, the last promised 15% is lost as bad debts.

In case of delay, damageed at 5% of the selling price in case of manufacturing and 5% of selling price in case of installation will be charged by customers. The damagees will be based on the selling price of that stage of the activity.
However, in some cases, delays are attributed to client–elated issues and hence such damagees are not payable.

Direct costs are incurred as 80% on manufacturing and 20% on inspection activities.
Data for the past 4 half years is provided below. At the beginning of half year 4, the cash balance was zero and the entire bank limit was utilized.

Delay Note 1 — Manufacturing delayed — Invoice Value Rs.40 lakhs.
Delay Note 2 — installation delayed — Invoice Value Rs.100 lakhs.
Credit is available on 40% on the direct costs where payments are effected in the next half year. On operating costs a delay of 45 days is reasonable.
You are required to work out a Cash Flow Forecast for the Half Year 4.