QUESTION 3 40 MARKS Hlathi Products Inc. is a manufacturing company whose stock is traded on the Johannesburg Stock Exchange. The company sells binders, paper and other school supplies and has a 31 July financial year end. The company is planning its cash needs for the 31 July 2020 month, being the last month of the financial year. Hlathi Products Inc. has been borrowing money during the first month of each quarter to support peak sales of back-to-school materials. Mr Hlathi is the chief executive officer of Hlathi Products Inc. In a meeting with investment analysts at the beginning of the year, Mr Hlathi had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Mr Hlathi concluded in early weeks of July of the end of the financial year ended 31 July 2020 that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Mr Hlathi has ordered that wherever possible, expenditures should be postponed to the new yearincluding cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Mr Hlathi ordered the company's financial manager to scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year. The following information has been assembled to assist in preparing a cash budget for the month of July 2020. Actual monthly income statement for May to June and the budgeted income statement for July and August are as follows: May June July August Actual Actual Budget Budget (R'000) (R'000) (R'000) (R'000) Sales 40 000 70 000 50 000 45 000 Cost of sales 24 000 42 000 30 000 27 000 Gross profit 16 000 28 000 20 000 18 000 6 Operating expenses Selling expenses 7 200 11 700 8 500 7 300 Administrative expenses 5 600 7 200 6 100 5 900 Net profit 3 200 9 100 5 400 4 800 ADDITIONAL NOTES 1. Sales are 20% for cash and 80% on credit. Credit sales are collected over a three-month period with a 20% collected in the month of sale, 45% in the month following sale, 33% in the second month following sale. The 2% of credit sales are usually not recoverable. Hlathi Products Inc. provides for the 2% credit sales in the month of sale and writes it off three months following sale. 2. Inventory raw material purchases are paid for in the month of purchase. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The product costs are generally split equally into raw materials, direct labour and overheads and are paid in cash except for machine depreciation which amounts to 30% of the overhead expenses. 3. Furniture costing R75 million will be purchased in July and subject to an annual depreciation of 10% per annum. The supplier requires R30 million deposit on the furniture and balance to be paid monthly over the life of the furniture. 4. Cash selling and administration expenses are paid in the month they are incurred. 5. On 1 May 2020, the company borrowed R10 million from its bank as needed to bolster the cash account. The loan is payable in four equal quarterly instalments payable in advance. The interest rate is 12% p.a. payable at the end of each month. The company had a positive cash balance of R3 590 000 on 30 June 2020. REQUIRED Marks (a) What impact will Mr Hlathi's actions have on the profitability of Hlathi Products Inc? Also discuss your concerns (if any) on the actions taken by Mr Gallant. 10 (b) Prepare a cash budget for the month of July 2020. 20 10 (C) Discuss the initiatives which Hlathi Products Inc. could implement to reduce the negative cash position of R16 million that will arise as at 31 July 2020. TOTAL 40 QUESTION 3 40 MARKS Hlathi Products Inc. is a manufacturing company whose stock is traded on the Johannesburg Stock Exchange. The company sells binders, paper and other school supplies and has a 31 July financial year end. The company is planning its cash needs for the 31 July 2020 month, being the last month of the financial year. Hlathi Products Inc. has been borrowing money during the first month of each quarter to support peak sales of back-to-school materials. Mr Hlathi is the chief executive officer of Hlathi Products Inc. In a meeting with investment analysts at the beginning of the year, Mr Hlathi had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Mr Hlathi concluded in early weeks of July of the end of the financial year ended 31 July 2020 that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Mr Hlathi has ordered that wherever possible, expenditures should be postponed to the new yearincluding cancelling or postponing orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year advertising and travel. Additionally, Mr Hlathi ordered the company's financial manager to scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year. The following information has been assembled to assist in preparing a cash budget for the month of July 2020. Actual monthly income statement for May to June and the budgeted income statement for July and August are as follows: May June July August Actual Actual Budget Budget (R'000) (R'000) (R'000) (R'000) Sales 40 000 70 000 50 000 45 000 Cost of sales 24 000 42 000 30 000 27 000 Gross profit 16 000 28 000 20 000 18 000 6 Operating expenses Selling expenses 7 200 11 700 8 500 7 300 Administrative expenses 5 600 7 200 6 100 5 900 Net profit 3 200 9 100 5 400 4 800 ADDITIONAL NOTES 1. Sales are 20% for cash and 80% on credit. Credit sales are collected over a three-month period with a 20% collected in the month of sale, 45% in the month following sale, 33% in the second month following sale. The 2% of credit sales are usually not recoverable. Hlathi Products Inc. provides for the 2% credit sales in the month of sale and writes it off three months following sale. 2. Inventory raw material purchases are paid for in the month of purchase. The company maintains its ending inventory levels at 75% of the cost of the merchandise to be sold in the following month. The product costs are generally split equally into raw materials, direct labour and overheads and are paid in cash except for machine depreciation which amounts to 30% of the overhead expenses. 3. Furniture costing R75 million will be purchased in July and subject to an annual depreciation of 10% per annum. The supplier requires R30 million deposit on the furniture and balance to be paid monthly over the life of the furniture. 4. Cash selling and administration expenses are paid in the month they are incurred. 5. On 1 May 2020, the company borrowed R10 million from its bank as needed to bolster the cash account. The loan is payable in four equal quarterly instalments payable in advance. The interest rate is 12% p.a. payable at the end of each month. The company had a positive cash balance of R3 590 000 on 30 June 2020. REQUIRED Marks (a) What impact will Mr Hlathi's actions have on the profitability of Hlathi Products Inc? Also discuss your concerns (if any) on the actions taken by Mr Gallant. 10 (b) Prepare a cash budget for the month of July 2020. 20 10 (C) Discuss the initiatives which Hlathi Products Inc. could implement to reduce the negative cash position of R16 million that will arise as at 31 July 2020. TOTAL 40