ZX is a relatively small US-based company in the agricultural industry

ZX is a relatively small US-based company in the agricultural industry. It is highly mech- anised and uses modern techniques and equipment. In the past, it has operated a very conservative policy in respect of the management of its working capital. Assume that you are a newly recruited management accountant. The Finance Director, who is responsible for both financial control and treasury functions, has asked you to review this policy. You assemble the following information about the company’s forecast end-of-year financial out- comes. The company’s year-end is in six months’ time. View complete question » ZX is a relatively small US-based company in the agricultural industry. It is highly mech- anised and uses modern techniques and equipment. In the past, it has operated a very conservative policy in respect of the management of its working capital. Assume that you are a newly recruited management accountant. The Finance Director, who is responsible for both financial control and treasury functions, has asked you to review this policy. You assemble the following information about the company’s forecast end-of-year financial out- comes. The company’s year-end is in six months’ time. US$’000 Receivables 2,500 Inventory 2,000 Cash at bank 500 Current assets 5,000 Fixed assets 1,250 Current liabilities 1,850 Forecast sales for the full year 8,000 Forecast operating profit (18% of sales) 1,440 You wish to evaluate the likely effect on the company if it introduced one of two alternative approaches to working capital management. The Finance Director suggests you adjust the figures in accordance with the following parameters: Receivables and inventory ‘ Moderate’ policy -20% ‘ Aggressive’ policy -30% Cash Reduce to $250,000 Reduce to $100,000 Fixed assets No change No change Current liabilities +10% +20% Forecast sales +2% +4% Forecast profit No change in percentage profit/sales Requirements Write a report to the Finance Director that includes the following: A discussion of the main aspects to consider when determining policy in respect of the investment in, and financing of, working capital, in general and in the circumstances of ZX. (10 marks) Calculations of the return on net assets and the current ratio under each of three sce- narios shown below: the company continues with its present policy the company adopts the ‘moderate’ policy the company adopts the ‘aggressive’ policy. (8 marks) A recommendation to the company of a proposed course of action. Your recommenda- tion should be based on your evaluation as discussed above and on your opinion of what further action is necessary before a final decision can be taken.

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