Study the information provided below and answer the following questions.

SKW Inc. is a provider of a range of strategic and operational advisory services to South African businesses. Recent challenges in the South African business environment have resulted in an increase in the demand for the services of SKW by businesses across South Africa and beyond.

Recently, you were hired as a junior business analyst by SKW. Your role is to prepare financial and non-financial operational analysis of diverse business data to allow for informed operational and strategic decision-making by the management of client businesses across South Africa.

The Case of Next Millenium Retail Services

SKW Inc. has been approached by Next Millenium Retail Services (NMRS), a South African-based retailer dealing in fast moving consumer goods (FMCGs). To address the recent poor financial performance, Mr Quinton Manga, the recently appointed financial manager of NMRS, is currently reviewing all financial records of the business and has gathered the following information:

INFORMATION

A. Working Capital Management

NMRSs current inventory policy is to order 100,000 units of a popular product every time an order is placed with the supplier. Forecast demand to meet market requirements for next year is 625,000 units of the product. The cost of placing and processing an order is R250, while the annual cost of holding a unit of the product in store is 5% of the unit purchase price. Both costs are expected to be constant next year. NMRS acquires a unit of the product for R100.00 from the supplier. Orders are received two weeks after being placed with the supplier. NMRS operates a 350-day year, and demand for the product is constant throughout the year.

B. Statement of Cash Flows of Next Millenium Retail Services

The extracts of the most recent Cash Flows Statement of NMRS provided below.

NEXT MILLENIUM RETAIL SERVICES

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2022

Cash flows from operating activities (1 150 000)

Profit before interest and tax (Operating profit)2 750 000

Adjustments to convert to cash from operations: Non-cash flow adjustments 475 000

Depreciation 500 000

Profit on disposal of equipment (25 000)

Profit before working capital changes 3 225 000

Working capital changes(3 000 000)

Increase in Inventory (2 250 000)

Increase in receivables (1 250 000)

Increase in payables 500 000

Cash generated from operations 225 000

Interest paid (125 000)

Dividends paid (500 000)

Company tax paid ?

Cash flows from investing activities (525 000)

Non-current assets purchased (750 000)

Proceeds from disposal of equipment 225 000

Cash flows from financing activities ?

Proceeds from issue of ordinary shares ?

Increase in long-term borrowings (675 000)

Net decrease in cash and cash equivalents 550 000

Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year ?

QUESTION 1 Required:

(12 marks)

Using the information on the working capital management at NMRS provided above, answer the following questions (round answers off to nearest whole number).

1.1. Based on NMRSs current inventory policy, calculate the total annual ordering costs of the product for next year. (3 marks)

1.2. Based on NMRSs current inventory policy, calculate the total annual carrying costs of the product for next year. (3 marks)

1.3. Based solely on the answers obtained in 1.1 and 1.2 above, comment on the optimality of NMRSs current

inventory policy.

1.4. Calculate the economic order quantity (EOQ) of the product for next year.

QUESTION 2

(2 marks) (4 marks)

(18 marks)

Based on the extracts of the Cash Flows Statement of NMRS provided above, answer the following questions:

2.1. Calculate NMRSs cash balance at the close of business on 30 June 2022 and state whether the balance is favorable or unfavorable. (2 marks)

2.2. Compute the proceeds from the issue of ordinary shares by NMRS during the financial year ended 30 June 2022.

(3 marks)

2.3. Determine the tax paid by NMRS during the financial year ended 30 June 2022. (2 marks)

2.4. Calculate the carrying value of the equipment sold during the financial year ended 30 June 2022. (2 marks)

2.5.By examining the cash flows from the investing activities undertaken by NMRS during the financial year ended 30

June 2022, briefly discuss a probable strategic intent of the management of NMRS. (3 marks) 2.6. Provide a meaningful interpretation of the extracts of NMRSs cash flow statement by discussing any three important

points.

(6 marks)