QUESTION 4 After analysing the current financial statements, XYZ Ltd. became concerned about its liquidity position. The income statement and statement of financial position for the year ended and as at 31 December 2021 are as follows. Income statement 000 000 Sales revenue 800 Cost of sales Opening inventories 300 Purchases 600 900 Closing inventories (150) (750) Gross profit 50 Expenses (150) Loss for the year (100) Statement of financial position 000 Non-current assets Property, plant and equipment Premises at valuation Fixtures and fittings at cost less depreciation Motor vehicles at cost less depreciation 250 180 50 480 Current assets Inventories Trade receivables 150 200 350 830 Total assets Equity Ordinary share capital Retained earnings 150 160 310 120 Non-current liabilities Borrowings - Loans Current liabilities Trade payables Borrowings - Bank overdraft 100 300 400 830 Total equity and liabilities The trade receivables and payables were maintained at a constant level throughout the year. REQUIRED: Please note: a maximum word count applies to some parts of this question. (a) Using examples, describe three types of costs that a business might incur due to holding insufficient inventories. (9 marks; max 315 words) (b) Using the information provided above: (i) Explain why the company is concerned about its liquidity position. Provide three reasons on which your argument is based. (9 marks; max 315 words) (ii) Assuming a 340-day year, calculate the operating cash cycle for the company based on the information above. In your answer, you should show the average inventory holding period, average settlement period for receivables, and average settlement period for payables separately. (12 marks) (iii) Based on your answer in (b) (i), state what steps may be taken to improve the operating cash cycle of the company. (8 marks; max 280 words) (iv) Regarding your answer in (b) (iii), explain three sources of information you might need to assess customer creditworthiness. Provide reasons for each source. (12 marks; max 420 words) QUESTION 4 After analysing the current financial statements, XYZ Ltd. became concerned about its liquidity position. The income statement and statement of financial position for the year ended and as at 31 December 2021 are as follows. Income statement 000 000 Sales revenue 800 Cost of sales Opening inventories 300 Purchases 600 900 Closing inventories (150) (750) Gross profit 50 Expenses (150) Loss for the year (100) Statement of financial position 000 Non-current assets Property, plant and equipment Premises at valuation Fixtures and fittings at cost less depreciation Motor vehicles at cost less depreciation 250 180 50 480 Current assets Inventories Trade receivables 150 200 350 830 Total assets Equity Ordinary share capital Retained earnings 150 160 310 120 Non-current liabilities Borrowings - Loans Current liabilities Trade payables Borrowings - Bank overdraft 100 300 400 830 Total equity and liabilities The trade receivables and payables were maintained at a constant level throughout the year. REQUIRED: Please note: a maximum word count applies to some parts of this question. (a) Using examples, describe three types of costs that a business might incur due to holding insufficient inventories. (9 marks; max 315 words) (b) Using the information provided above: (i) Explain why the company is concerned about its liquidity position. Provide three reasons on which your argument is based. (9 marks; max 315 words) (ii) Assuming a 340-day year, calculate the operating cash cycle for the company based on the information above. In your answer, you should show the average inventory holding period, average settlement period for receivables, and average settlement period for payables separately. (12 marks) (iii) Based on your answer in (b) (i), state what steps may be taken to improve the operating cash cycle of the company. (8 marks; max 280 words) (iv) Regarding your answer in (b) (iii), explain three sources of information you might need to assess customer creditworthiness. Provide reasons for each source. (12 marks; max 420 words)
