JOY Ltd operates a business to do with warehousing and distribution of books and CDs for Gladys Ltd, an on-line business. For this purpose, JOY rented warehouses in each major town in the country and the actual delivery of orders was outsourced to a courier service. The market was becoming increasingly competitive and the year ending 31 December 2020 had not been as successful as the previous years. The founder and CEO was very frustrated with the complex integrated computer system that dealt with all the logistics. The system is down most of the time; as a result, money is lost through lost business and poor service delivery.

The CEO is of the view that there is real fear that Gladys Ltd may penalize the company or indeed engage another company in the place of JOY Ltd. A lot of money is spent on computer consultants who practically live at JOY’s offices and what is worse they do not appear to make any difference.

Since the logistical system was linked to the general ledger, all the problems had been making meaningful reporting and financial management extremely difficult. This has caused the JOY accountant to quit just before year end. The bookkeeper extracted the following information for the year ending 31 December 2020 and forwarded it to you (all accounts are to be prepared to the nearest K1000):

Gladys was JOY’s only customer and all sales were made on credit. JOY processed 1.62 million orders during the year and charged Gladys K20 per order fulfilled. 

The delivery charge paid to the courier was treated as the cost of goods sold and it was K6.50 per order

At the time of setting up JOY Ltd, 20 million ordinary shares of par value K1 per share were issued. There has been no further share issue since then.

General and administrative expenses for the year were worth K6.2 million

Selling and marketing expenses were estimated at 2½% of sales.

The non-current assets consisted of IT infrastructure and warehouse equipment. They were valued at K57.63 million after depreciation expense for the year of K4.34 million

There was no long-term loan or overdraft. Hence there was no interest expense in the year.

Gladys takes a long time to settle its accounts and as at year-end was taking 56.7 days to settle their account.

The goods in JOY’s warehouse belonged to Gladys. Packaging material and consumables on hand at 31 December 2020 were valued at K0.420 million.

Retained earningsb/f on 1/1/2020 was K50.948 million.

The couriers were owed K0.610 million at 31/12/2020.

Company income tax rate was 25% and the company dividend policy was to pay half the earnings after tax as dividend.

The CEO knew that they had a lot of money in the bank at the year-end, had not received the bank statement and no reconciliation statement had been prepared.

The CEO wanted you not only to finalise the accounts for the year ending 31/12/2020 but also needed serious advice about the financial implications of ideas he had for the following year. The large IT company that supplied and supported the IT infrastructure had approached him with a proposal. They suggested that JOY sell them the system and outsource the entire function to them. He really liked the idea of getting rid of this headache and would need the cash if he was going to explore his other ideas. For the last two years JOY had not been happy with the property developers who leased the warehouse to JOY. The CEO felt that they were too expensive and did not honour the accepted responsibilities of a landlord. He had spoken to them and discovered that as landlords they were in fact keen to get out of industrial property altogether. They offered to sell the buildings to JOY for a reasonable price and the CEO liked the idea of not being held at ransom by them in the future. It was however a big decision for him to make and would necessitated JOY borrowing quite a lot of money for the first time ever. After discussions with you and his operating team, he asked you to prepare a budget projection based on the following information:

Transaction volume would increase by 30%. Gladys were not prepared to put up their rate, so it would remain at K20 per order fulfilled

JOY would sell their IT infrastructure for its book value of K34.8 million and the outsourced service provider would charge them a flat fee of K1 per transaction

 Cost of sales would rise to K7.50 per transaction as the IT cost of K1 would be added to the existing delivery charge of K6.50 which would not change from last year

The warehouses would be purchased for an amount of K92 million and to help fund this CEO had sourced a long-term loan of K54 million.  The interest on this loan would be K6.83 million for the year

The warehouses were not going to be depreciated at all, so the charge for the year ended 31/12/2021 would drop to K2.77 million

Stock levels were predicted to increase to K0.72 million by year end

The tax rate and company divided policy were not expected to change

The CEO was determined to manage the Gladys account better during the following year and felt that he could get their average time to payment down to 51.5 days. However, as the delivery courier was pushing for even earlier payment the CEO felt that it would be prudent to budget creditors as exactly the same nominal value as last year

General and administrative costs would be reduced to K4.2 million for the year and this would enable the CEO to up marketing expenses to 4% of sales. He felt that it was a good idea to for him to look for new clients to reduce his dependency on Gladys and help utilize spare capacity

The CEO still did not want to have an overdraft and wondered what cash position the above scenario would leave the company with.

Required: for the year to 31/12/2020 ;

Prepare a cash flow statement