Inventory Valuation Methods, Cash Flow Planning, and Strategies to Reduce Receivable Turnover Days

Part a: Inventory Valuation Methods and Implications on Net Income and Tax

Part a:

Explain three inventory valuation methods, and discuss the implications of choosing different inventory methods. How these methods are used to manipulate net income and pay lesser tax?

High receivable turnover days are one of the major cause of insolvency. Cash flow planning involves making sure that a business generates enough cash to be able to pay day-to-day expenses.

For example, many manufacturing businesses have a cash cycle. They buy raw materials and parts on credit and then manufacture goods, which they store as stock. They then sell these goods on credit to customers.In the meantime, they have overheads and a workforce to pay. A problem for traders is that they expect credit customers to pay on time. This provides the cash to continue the credit cycle and to pay wages and other outstanding bills. Unfortunately, the cycle often breaks down because very often credit customers are slow to pay. This leaves the businesses with a cash flow problem and increase its receivable turnover days. Based on the information above, recommend five different strategies that businesses can implement in order to reduce its receivable turnover days.  

Part b:

National food is a producer of prepackaged food. The unadjusted trial balance as at 31st august 2019 is provided below:

National food

Unadjusted trial balance as at 31st august 2019

While preparing the financial statements for the business, the accountant was given the following additional information.

Plants and machinery is depreciated using reducing-balance method at 20% per annum.

Delivery van is depreciated using straight-line method. The estimated life of delivery van is 8 years with rm20,000 residual value. The delivery van was purchased on 1st march 2019.

Advertising expense included prepaid advertising (rm5,000) for september 2019.

Provision of doubtful debt was decreased by rm1,000.

Accrued salaries expense, rm3,000.

Inventory (as at 31st august 2019) was rm19,000.

(a) prepare the adjusted trial balance for national food as at 31st august 2019.     

(b) prepare the statement of comprehensive income and statement of owners equity for national food for the year ended 31st august 2019.   

(c) prepare the statement of financial position for national food as at 31st august 2019.             

Part c :

It has always been companies’ aim to have a favourable receivables turnover ratio. Discuss 4 different strategies that gfm can implement in order to improve its cash flow position.

Gfm set to list on bursa after a long-delayed reverse takeover

Part b: Adjusting the Trial Balance and Financial Statement Analysis

After some delay, the reverse takeover (rto) of asiaep resources bhd by facilities management firm gfm services bhd has now come to fruition. Gfm is scheduled to list on the ace market of bursa malaysia on jan 9, 2017, which will see the company raising a total proceeds of rm42mil. “the listing price for gfm shares has been fixed at 38 sen apiece, from 22 sen previously,” Managing director ruslan nordin tells starbizweek.

Ruslan explains that gfm is in a net cash position of rm5mil and has generated net operating cashflow of rm38.8mil in financial year 2015 (fy15). Gfm has rm25mil in cash and rm20mil in borrowings. “gfm has a healthy cash position and hence does not need new fresh capital for now. Gfm’s core business is in the integrated facility management (ifm) industry. Gfm provides integrated facilities management and consultancy services. It has 26 ongoing projects and has completed rm1.2bil worth of projects to-date. Gfm has an orderbook of rm377mil currently.

In fy15, gfm posted a profit after tax of rm13.8mil on the back of rm78.4 revenue. Its profit after tax margin in fy15 was at 18% and earnings before interest, tax, depreciation and amortisation was at rm19.3mil. “with the listing status of gfm, it would boost the company profile and elevate its market positioning,” Ruslan says. “previously, we only had one large customer contributing more than 80% of our total revenue. On top of that, we had receivable issues that need to be solved,” He says.

On the company’s receivables, gfm chief executive officer jeffery mohamad akhir says the company has set up a new work process to reduce its trade receivables turnover period to 76 days. “in this industry, cashflow is important. I’m proud to say that our receivable turnover has been cut down from five to six months a few years ago,” He says.

The ifm industry is expected to grow 9% annually from 2015 to 2020, on the back of raising awareness of sustainability and green building initiatives, according to ruslan. “outsourcing operations and maintenance helps companies save operating costs. They will no longer need to employ full-time staff to do this and are able to better focus on their core businesses,” He explains. Going forward, gfm is poised to benefit from more government public-private partnership (ppp) projects.

The financial statement of khan ltd is given below:

Prepare the statement of cash flows for khan ltd. For the year ended 31 august 2019 using the direct method. (show all calculations)  part d :

Based on the article below, if there is another round of unexpected drastic fall in the current commodity prices, suggest the possible implications of uem edgenta bhd’s gearing situation on the company’s:

Current borrowings       

Additional borrowings in the near future.