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CIMA G1 - CIMA Gateway Exam

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Total 20 questions

Six months have now passed since the documentary was broadcast. Pizzatime's sales continue to be depressed.

 

Pizza2Go, Pizzatime's biggest competitor, has gone to great lengths to ensure that consumers remember the documentary that caused the problems by publishing adverts and mentioning it in press articles.

 

There have also been continuing press reports concerning customers who are taking legal action against Pizzatime for food poisoning that they attribute to eating pizzas made from tainted flour. Many of those cases have already been dismissed as lacking substance, but the adverse publicity continues.

 

Pizzatime's Chief Executive has emailed you:

From: Monica Lall, Chief Executive

To: Financial Manager

Subject: changes to corporate structure

 

Hi,

I am getting fed up with the continuing negative publicity from this documentary, especially since nobody has actually demonstrated to my satisfaction that we have caused a single case of food poisoning.

 

One possibility that has been put forward is that we should sell 90% of the equity in the subsidiary company that manufactures our dough. We will then open up the contract for the supply of dough to a competitive tendering process. Our intention would be to identify a single supplier who would win the contract to supply all of our restaurants.

 

The former subsidiary would be free to tender along with anyone else, but would be subject to the same stringent conditions for quality and value for money. We would retain 10% of the subsidiary to retain some influence over the way the business is run. We will, of course, be able to claim that the subsidiary is 'under new management' if it is indeed the successful bidder.

 

All of the subsidiary's sales are intra-group. We founded the subsidiary in 2005 when we acquired 100% of the subsidiary's equity that was issued at par. The pizza dough is sold at a fair market value and so the subsidiary has a substantial credit balance on retained earnings.

 

Please email me your thoughts on the following:

 

What impact will the disposal of the subsidiary have on Pizzatime's consolidated financial statements?

 

We don't require calculations at this stage, but we do need to know what will happen to the accounts.

How would this arrangement affect our management of the supply chain?

 

How can we tell whether the net effect of divesting this subsidiary and buying in dough will be to enhance future cash flows?

 

Thanks

 

Monica Lall

Chief Executive

Pizzatime

A few days later, you receive the following email:

From: Matt Spot, Finance Director

To: Financial Manager

Subject: outsourcing and accounting decisions

 

Hello

 

I have just come from a Board meeting and am pleased to tell you that the Board has approved plans for changing our ordering system as well as the menu.

 

The plan is to install hi-tech devices so that customers can order their own food and drinks. Each restaurant table will be fitted with the devices. I have attached a suggested screen layout for you to look at. The coloured squares are all touch sensitive.

 

We are considering outsourcing to O-tech the installing, operating and updating of the software that runs the system. O-tech is a software house that specialises in such applications. We would pay an annual fee to O-tech to maintain and update the software in response to any changes that we make to prices or products. O-tech also install all software updates. Alternatively, we could buy a licence for the software and have it managed by our own IT staff.

 

We will purchase outright any hardware required, including the table top and associated network devices. The hardware has an expected useful life of five years, this will lead to a hefty depreciation charge and could depress management bonuses. The hardware supplier has offered to write a report that states that the life could be up to ten years and that we could justify depreciating the hardware over a longer period. If we show that report to our external auditor and charge the lower depreciation nobody will realise that we have understated depreciation until we have to replace the hardware after five years. We can claim to have made an honest mistake when that happens, if we are still working here then. Who knows? These devices might even last for ten years!

 

I need your ideas on:

 

Whether it is advisable to outsource the software to O-tech. Please explain the main factors that affect this decision.

 

The ethical issues that arise in relation to the proposal to depreciate the hardware over ten years.

 

Matt

Forecast financial statements for the year ended 31 December 2016

 

You have received the following email:

From: Monica Lall, Chief Executive

To: Financial Manager

Subject: projected profits

 

Hi,

 

The controversy over Town Logistics continues. The Board is feeling a little sensitive to criticism over their management of Pizzatime's relationship with the company. With that in mind, I have had the Finance Director prepare a set of forecast financial statements, which I have attached to this email.

 

The new home delivery service will have been fully operational for almost six months by the year end. The service has already been hugely successful and has significantly increased both revenue and profit.

 

The directors' bonuses are linked to reported revenue according to the financial statements. As a retail organisation, our survival depends on sales revenue. Also, our restaurant managers' revenue targets are based on total revenue, including home delivery sales, although many of them have refused to accept responsibility for these sales.

 

I need your advice on two matters:

 

The first is that we are planning to argue that the shareholders should take comfort from these figures and should relax and allow the Board to manage Pizzatime without undue interference. Do you agree that these figures show that the Board is excelling?

 

Can we argue that the present directors' bonus scheme continues to align our interests with those of the shareholders? On a related matter, is the refusal of the restaurant managers to accept responsibility for home delivery sales justified?

 

Regards

 

Monica Lall

Chief Executive

Pizzatime

The Finance Director stops you in the corridor and says the following:

"I have been asked to convene a working party that will report to the Board. The working party's remit is to make a recommendation concerning the proposal that Pizzatime should enter the home delivery market. This will be a major expansion of our business. The idea has come from Marketing and Bilal seems very keen on getting the Board to proceed. In fact he's even had one of his staff produce these flyers. Have a look at this!

 

I would like you to draft a paper for me that covers the following:

 

Is this proposal consistent with Pizzatime's current strategy?

 

What will be the difficulties associated with predicting the profitability of this new sales channel? What decisions will we have to make about the delivery method and location of preparation facilities before we start to analyse potential profitability?"

Comparative results for Pizzatime and Pizza2Go

You have received the following email:

From: Monica Lall, Chief Executive

To: Financial Manager

Subject: benchmarking and growth ideas

 

Hi,

 

As you will already be aware, in 2015 our annual growth in both earnings and revenue was well below the target of 10%. This has clearly been a disappointment to our shareholders and we need to take rapid action to rebuild market confidence and avoid a fall in our share price. I would value your input on this one.

 

You will also see, from the financial data in the attachment, that our competitor, Pizza2Go, has reported higher growth and also a higher ROCE and I need to be able to explain these figures to our analysts. It would be really helpful to understand what they mean in terms of shareholder returns. The earnings growth figures are particularly disappointing, especially as Pizza2Go has shown such strong growth.

 

I need a response to this email as soon as possible that:

   • Analyses the financial data in the attachment and explains what the ROCE and earnings growth figures mean in terms of the relative success of the two companies and returns to shareholders. I notice that we have a much higher gross profit margin and approximately the same earnings yield. Is it possible that the ROCE and earnings growth figures are misleading and that we are actually performing better than Pizza2Go?

   • Suggests ways in which we could improve profitability. Use Porter's value chain model as your base.

 

Regards

 

Monica Lall

Chief Executive

Pizzatime

A further three months have passed. Pizzatime now has 15 franchised restaurants in C-land, mainly in large towns and cities. You have received the following email:

From: Monica Lall, Chief Executive

To: Financial Manager

Subject: press report

 

Hi,

 

Have you seen the latest news story? I have attached a copy to this email just in case.

 

We need your advice. As you know, the franchise agreements that we have signed with restaurants in I-land and P-land specify that there will be a standard employment contract for all employees. Franchise holders are required to offer their restaurant staff the same terms and conditions as we have in the restaurants that we own ourselves. We have always been regarded as responsible employers and we pay more than the minimum 'living wage' that has been calculated by the governments of both I-land and P-land.

 

Potential franchisees in C-land refused to grant us the right to set a minimum rate of pay or to standardise terms and conditions. We were forced to permit them to decide for themselves in order to have them sign up. Legally speaking, none of the restaurant staff in C-land work for us, they are all employees of the franchise owners. Perhaps we should have foreseen this, but we did not appreciate that the culture in C-land was quite so unsympathetic.

 

Regardless of what has gone wrong in the past, we are clearly going to have to make changes. We have already written to all franchisees in C-land to inform them that we will be monitoring their employment practices closely. Unfortunately, we have not yet decided how we are going to do that.

 

I need you to brief me on two issues.

 

Firstly, how big an impact can national cultures have on business practices? Was it unethical of us to have agreed to permit franchisees in C-land to set their own employment terms?

 

Secondly, what reporting systems might we put in place to ensure that C-land's franchisees treat their staff in a manner that would be deemed acceptable in terms of our corporate values? Explain how we could make this monitoring effective.

 

Regards

 

Monica Lall

Chief Executive

Pizzatime