Assignment Task :

Part A

Question 1

Explain three inventory valuation methods, and discuss the implications of choosing different inventory methods. How these methods are used to manipulate net income and pay lesser tax?

Question 2

High receivable turnover days are one of the major causes of insolvency. Cash flow planning involves making sure that a business generates enough cash to be able to pay day-to-day expenses.

For example, many manufacturing businesses have a cash cycle. They buy raw materials and parts on credit and then manufacture goods, which they store as stock. They then sell these goods on credit to customers. In the meantime, they have overheads and a workforce to pay. A problem for traders is that they expect credit customers to pay on time. This provides the cash to continue the credit cycle and to pay wages and other outstanding bills. Unfortunately, the cycle often breaks down because very often credit customers are slow to pay. This leaves the businesses with a cash flow problem and increases their receivable turnover days. 

a) Based on the information above, recommend five different strategies that businesses can implement in order to reduce its receivable turnover days.

 

Part B

Question 1

It has always been companies’ aim to have a favorable receivables turnover ratio. Discuss 4 different strategies that GFM can implement in order to improve its cash flow position. 

AFTER some delay, the reverse takeover (RTO) of AsiaEP Resources Bhd by facilities management firm GFM Services Bhd has now come to fruition. GFM is scheduled to list on the ACE Market of Bursa Malaysia on Jan 9, 2017, which will see the company raising the total proceeds of RM42mil. “The listing price for GFM shares has been fixed at 38 sen apiece, from 22 sen previously,” managing director Ruslan Nordin tells StarBizWeek.

Ruslan explains that GFM is in a net cash position of RM5mil and has generated net operating cashflow of RM38.8mil in the financial year 2015 (FY15). GFM has RM25mil in cash and RM20mil in borrowings. “GFM has a healthy cash position and hence does not need new fresh capital for now. GFM’s core business is in the integrated facility management (IFM) industry. GFM provides integrated facilities management and consultancy services. It has 26 ongoing projects and has completed RM1.2bil worth of projects to-date. GFM has an orderbook of RM377mil currently.

In FY15, GFM posted a profit after tax of RM13.8mil on the back of RM78.4 revenue. Its profit after tax margin in FY15 was at 18% and earnings before interest, tax, depreciation, and amortization were at RM19.3mil. “With the listing status of GFM, it would boost the company profile and elevate its market positioning,” Ruslan says. “Previously, we only had one large customer contributing more than 80% of our total revenue. On top of that, we had receivable issues that need to be solved,” he says.

On the company’s receivables, GFM chief executive officer Jeffery Mohamad Akhir says the company has set up a new work process to reduce its trade receivables turnover period to 76 days. “In this industry, cash flow is important. I’m proud to say that our receivable turnover has been cut down from five to six months a few years ago,” he says. 

The IFM industry is expected to grow 9% annually from 2015 to 2020, on the back of raising awareness of sustainability and green building initiatives, according to Ruslan. “Outsourcing operations and maintenance help companies save operating costs. They will no longer need to employ full-time staff to do this and are able to better focus on their core businesses,” he explains. Going forward, GFM is poised to benefit from more government public-private partnership (PPP) projects.

 

Part C

Question 1

Based on the article below, if there is another round of unexpected drastic fall in the current commodity prices, suggest the possible implications of UEM Edgenta Bhd’sgearing situation on the company’s:

  1. Current borrowings

  2. additional borrowings in the near future 

PETALING JAYA: UEM Edgenta Bhd’s gearing is poised to drop by half after it announced plans to dispose of its 61.2% stake in New Zealand-based public-listed subsidiary, Opus International Consultants Ltd (OIC). The asset management service provider said its gross gearing would drop to 0.4 times from 0.8 times after the corporate exercise is completed. 

The gearing is also inclusive of the drawdown of its RM300mil Sukuk in April 2017, the company said in a statement. “The proposed disposal of OIC is an opportunity for UEM Edgenta to monetize its investments upfront at a healthy premium over the current market price,” it said. The buyer, which had expressed the intent to purchase, is Canadian company WSP Global Inc that is listed on the Toronto Stock Exchange.

WSP provides management and consultancy services to the built and natural environment industries.

UEM Edgenta’s managing director and chief executive officer Datuk Azmir Merican said in the statement the proceeds from the exercise would be used mainly to pare down its debts. “It will also provide UEM Edgenta with the financial resources and enable management to focus on driving as well as supporting the organic growth and operational excellence initiatives in our core sectors in healthcare, infrastructure and real estate in our key markets,” Azmir said.

WSP will purchase the OIC stake with an all-cash consideration that is worth NZ$1.78 per OIC share, totaling NZ$263.2mil (RM823.6mil). “The offer of NZ$1.78 plus the NZ$0.07 dividend would represent cash proceeds to OIC shareholders of NZ$1.85 per OIC share (totaling NZ$273.6mil or RM856mil). “Gross proceeds to UEM Edgenta amount to NZ$167.4mil (about RM523.9mil) for its 61.2% equity stake in OIC,” it added.

 

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  • Posted on : February 24th, 2019

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