The company is planning to change its policy regarding cash-in-hand from the year 2022 and will maintain a balance of Rs. 250,000. The stock and accounts receivable are expected to increase by 10%. Plant and equipment and accounts payable will observe a rise of 20% and 12%, respectively. Prepaid insurance and outstanding salaries will remain the same. The company proposes to increase transfer to retained earnings by 10% and general reserve by 25%. There will be no additional issuance of equity share capital and debenture securities in the year 2022. The rate of income tax is 33%. Answer the following questions

i. Comment on the capital structure of the company for the years 2021 and 2022. How have its debtservicing capabilities been affected over the same period? (2 marks)

ii. As the operations manager, determine whether the company should expect a rise or a fall in its cash conversion cycle for the year 2022? (3 marks)

Q6. The following information is taken from the records of XYZ Ltd. Sales for the year 2022 are expected to grow by 15%. Cost of goods sold will remain in the same proportion as before and other operating expenses are expected to reach Rs. 66,000. Extract of its financial position and performance for 2020 and 2021 is given as follows: Particulars 2020 2021 Sales 1,525,000 1,692,750 1,220,000 1,354,200 Cost of goods sold Other operating expenses 45,000 52,000 Bank 215,000 162,500 210,000 265,000 Accounts receivable Stock 300,000 380,000 Plant and equipment 480,000 545,000 Prepaid Insurance 45,000 35,000 125,000 200,000 Accounts payable Outstanding Salaries 11% Debentures 95,000 152,500 300,000 300,000 Equity share capital 450,000 450,000 Retained earnings 130,000 160,000 General Reserve 150,000 125,000 Q6. The following information is taken from the records of XYZ Ltd. Sales for the year 2022 are expected to grow by 15%. Cost of goods sold will remain in the same proportion as before and other operating expenses are expected to reach Rs. 66,000. Extract of its financial position and performance for 2020 and 2021 is given as follows: Particulars 2020 2021 Sales 1,525,000 1,692,750 1,220,000 1,354,200 Cost of goods sold Other operating expenses 45,000 52,000 Bank 215,000 162,500 210,000 265,000 Accounts receivable Stock 300,000 380,000 Plant and equipment 480,000 545,000 Prepaid Insurance 45,000 35,000 125,000 200,000 Accounts payable Outstanding Salaries 11% Debentures 95,000 152,500 300,000 300,000 Equity share capital 450,000 450,000 Retained earnings 130,000 160,000 General Reserve 150,000 125,000