Question 2 Lion Apparel Ltd is a relatively young company in the apparel business, selling clothing. At the beginning of June, the company has an overdraft of 112,000. The table below shows the income and expenses of the firm for the upcoming 6 months : Revenue Sewing machines bought Public Relations Equipment Lease Utility Salary Miscellaneous expenditure June 000 240 312 30 80 0 32 40 July 000 300 360 36 0 60 32 48 August September October November 000 000 000 000 340 440 500 560 390 40 0 0 36 48 320 50 80 0 36 52 300 60 0 0 40 52 320 60 0 0 40 52 The firm intends to buy a new delivery vehicle in August for 48,000. The company have to pay taxes amounting to 60,000 by September 1". The firm's clothing are sold to individual customers by cash. However, the firm sell to clothing shops on a 4 months trade credit. Individual customers made up 80% of sales. Accounts receivable in June amounts to 220,000. 25% of this amount is from sales in the month of May, 25% from the month of April, 25 % from the month of March and 25% from the month of February. The firm's sewing machines are bought through accounts payable of 3 months. This occur in the beginning of June. The balance of the accounts payable in the beginning of June is 280,000. Depreciation of sewing machines amounts to 1,000 per month. Miscellaneous expenses incorporate 16,000 per month for depreciation. The sales price is expected to increase by 2% per month June onwards. Salary is expected to increase by 1% per month June onwards. Required: (a) (b) Graham who is the Chief Financial Officer (CFO) of Lion Apparel Ltd argued that the cash flow forecast can be a complicated financial process and there are no benefits attached to it. Do you agree or disagree with Graham's argument ? Justify your stance with proper explanations. (3 marks) One day, Lion Apparel Ltd encounter a surge in its sales and other business activities. Evaluate a potential problem that the firm is very likely to encounter under this scenario. In your discussion, explain the risks that the firm will encounter with respect to this problem. (4 marks) Create a cash flow forecast for Lion Apparel Ltd from 1 June to 30th November. Show the cash balance at the end of each month. (12 marks) (d) Based upon the cash flow forecast, evaluate Lion Apparel's liquidity and discuss the potential problems (if any) the firm may encounter. In your discussion, provide suggestions on how to improve the firm's liquidity.