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All sales and purchases are made on credit. The business is considering whether to grant extended credit facilities to its customers. It has been estimated that increasing the settlement period for trade receivables by a further 20 days will increase the sales revenue of the business by 10 per cent. However, inventories will have to be increased by 15 per cent to cope with the increased demand. It is estimated that purchases will have to raise to MYR 1668,000 during the next year because of these changes. To finance the increase in inventories and trade receivables, the business will increase the settlement period taken from the supplier by 15 days and use a loan facility bearing a 10 per cent rate of interest for the remaining balance. If the policy is implemented, bad debts are likely to increase by MYR 120,000 a year and administration costs will rise by 15 per cent.

Questions

(a) Calculate the increase or decrease to each of the following that will occur in the forthcoming year if the proposed policy is implemented: I. Operating Cash Cycle (based on year-end figures) II. Net investment in inventories, trade receivables and trade payables and III. Profit for the period

(b) Should the business implement the proposed policy? Give reasons for your conclusion.

Yumee Bhd is a food wholesaler. The most recent financial statement of the business is as follows; Statement of financial position as at 31 May

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