Question 2

XYZ Pte Ltd has just completed its budgeting exercise. It expects the following to take place in financial year ending 30 June 2024.

Revenue (consisting entirely of credit sales) to grow by 10%. Gross profit margin to remain constant.

Due to the cost-cutting exercise, operating expenses should increase at only half the rate of revenue.

The company will continue with its straight-line method of depreciation for its existing equipment.

No equipment or land is expected to be disposed.

Cost of debt for financial year ending 30 June 2023 can be estimated as Interest Expense in 2023 / Beginning bank loan of 2023. Cost of debt is expected to remain constant in FY 2024

. Corporate tax rate to remain unchanged at 17%.

The company plans to pay the same dollar amount of dividends as FY 2023.

Days of sales outstanding, days of inventory on hand and number of days payable for FY 2024 is expected to be at the average level of FY 2022 and FY 2023. (You may use ending balance sheet figures to calculate these ratios.)

Accrued expenses, prepaid expenses and tax payable are expected to be unchanged from FY 2023.

New equipment costing $100,000 will be purchased on 1 July 2023 and depreciation is expected to be on straight line method over 4 years.

No capital injection is planned. The company is scheduled to repay bank loans with book value of $40,000 on 30 June 2024.

(a) create a pro-forma Profit and Loss account for FY ending June 2024.

(b) create a pro-forma Balance Sheet as at 30 June 2024. (Hint: You should take cash as the balancing item)

(c) Appraise the cash flow situation in FY 2024 and explain whether the situation is healthy. You should refer to the answers above to substantiate your answer.

(d) Illustrate three (3) other initiatives that could improve the situation.