IMPORTANT

For Assignment 1: Addressing client concerns, you will use the following four scenarios. You must provide an answer to all four scenarios in the written report and then choose one of the four scenarios to present in the recorded video.

Case study

Zeta owns a consulting company that specialises in providing strategic business solutions to clients in various industries. Zeta Consulting Services Limited (Zeta Consulting) was established in 2018, and since then, it has experienced steady growth. Zeta has recently appointed you as a financial advisor and asked you to provide advice to and address any concerns of the clients outlined in the scenarios.

Scenarios

Select the following headings to read each scenario and related task in depth.

Scenario 1: Investment decision

John, a young professional, recently received a substantial bonus of $65,000 and is considering investing it for a period of 10 years. He is eager to understand the time value of money and its impact on his investment decision.
John approached Zeta Consulting for guidance on making a smart financial decision.

Option A: Low-risk term deposit

Option A is to invest the $65,000 in a low-risk term deposit with a fixed interest rate of 4% per annum. The interest is compounded annually, and John will receive the interest payments at the end of each year.

Option B: High-risk crypto assets

Option B is to invest the $65,000 in a high-risk crypto asset that has the potential to yield a higher annual return of 23%.
However, the crypto assets’ performance is uncertain, and John understands that he may face a higher risk with this investment.

Task 1

Critically analyse each option and explain to John the consequences and implications of each investment option.
Include all workings where applicable. Your analysis should include:

• future value calculations
• risk and return considerations
• the effect of changes in interest rates and inflation
• a recommendation on the best option for John—the recommendation must be justified and linked to the analysis made.

Scenarios

Select the following headings to read each scenario and related task in depth.

Scenario 2: Cost behaviour analysis

ReliableTech Enterprises is a manufacturing firm that produces and sells widgets. The company is unsure how to manage the costs of the widgets and if the widgets are profitable or not. The Board of Directors of ReliableTech Enterprises has provided you with the following information:

ReliableTech Enterprises information

Task 2

Perform a detailed cost analysis and explain to the Board of Directors how the different aspects of costs affect cost behaviour and profitability.
Include all workings where applicable. Your analysis and explanation should include the following:

• cost behaviour analysis
• breakeven analysis
• target profit analysis assuming a target profit of $10,000
• the margin of safety, assuming ReliableTech Enterprises expects to sell 4,500 widgets
• operating leverage, assuming ReliableTech Enterprises sells 2,000 widgets
• point of indifference, an alternative cost structure with lower fixed costs and higher variable costs: new fixed costs of $40,000, new variable costs per widget of $6
• a recommendation on strategies to optimise cost allocation, set appropriate widget pricing, and identify potential areas for cost reduction or revenue improvement. The recommendation must be justified
  and linked to the analysis made.

Scenario 3: Budgets

Rianiana Chocolate Factory produces and offers high-quality boxed chocolates. The company is reviewing its financial performance over the last financial year against its original budget. The CFO provided you with the following variance analysis report for the year:

Variance analysis report

The direct materials, direct labour and other variable costs change in accordance with the changes in the number of boxes produced, and sales commissions are paid to the sales team at 10% of sales dollars.

Task 3

A new manufacturing machine which requires raw materials of higher quality was implemented during the year,
which resulted in some staff being paid extra overtime, as they were learning how to use it.
Using the additional information and the flexed budget variances calculated, interpret, and explain the following variances:

• flexed variance for sales
• flexed variance for materials
• flexed variance for direct labour
• flexed variance for sales commission

Given the effects of the variances above on the profit, explain if the Rianiana Chocolate Factory should continue using
the new machine and materials of higher quality.

Scenario 4: Financial statements

Innovative Tech Solutions is a startup company that provides innovative software solutions to businesses. The company was founded two years ago and has been experiencing steady growth in its customer base. As the company continues to expand its operations and invests in new equipment and technology, its financial management becomes crucial for sustainable growth and profitability. The managing director requires advice on the following:

Accrual accounting and revenue recognition

One of Innovative Tech Solutions’ major clients signed a contract for a customised software solution. The contract was for two years, and the total contract value was $240,000. According to the contract terms, the client was required to pay 50% of the total contract value upfront as a deposit, and the remaining amount would be paid based on the project’s progress.

The project commenced on 1 January 2023. By 31 December 2023, Innovative Tech Solutions had completed 60% of the project, and the client paid a further 40% of the contract value. The project was completed on 30 June 2024, as per the contract terms.

In 2023, Innovative Tech Solutions invested in new equipment to enhance its software development capabilities. The company purchased a server for $50,000, which is expected to have a useful life of five years with no residual value. The company uses the straight-line depreciation method.

At the end of the financial year 2023, the management of Innovative Tech Solutions is reviewing the company’s financial performance and making decisions for the upcoming year. They need to understand the financial health of the company and evaluate its growth potential.

The extracts of the financial statements for the year ended 31 December 2023, including the income statement and balance sheet,
which show the following key figures:

Income statement for the year ended 31 December 2023

Balance sheet as at 31 December 2023

Task 4

To complete Task 4, answer the following questions:

1. How should Innovative Tech Solutions recognise revenue for the project in its financial statements for the year ended 31 December 2023?
2. What is the impact of the revenue recognition on the income statement and balance sheet as at 31 December 2023?
3. How will the depreciation expense impact the income statement and balance sheet for the year ended 31 December 31 2023? Show all workings.
4. Briefly comment on Innovative Tech Solutions’ financial performance and financial position based on the income statement and balance sheet figures. Show all workings.