Question

Assume that Covidabravo Sdn. Bhd. is a large merchandising wholesale business operating in Malaysia. The company is affected by the Covid-19 pandemic. Hence, the top management has called for ideas on potential strategies recommendation to overcome potential negative impact of the pandemic on profitability and solvency of the company. As one of the bright new management executives, you are eager to present your recommendation in the next coming online management meeting. To do that, you need to show some calculations, based on prior years’ financial statements, that support your recommendations. You concentrated your study of financial statements on the company’s statement of profit or loss and other comprehensive income. The statement of profit or loss and other comprehensive income for Covidabravo Sdn. Bhd. of selected prior years is presented below: Covidabravo Sdn. Bhd. Statement of Profit or Loss and Other Comprehensive Income Year Ended 31 December 2019 2018 2017 RM (000) RM (000) RM (000) Sales** 32,376 30,601 27,799 Cost of merchandise sold 17,405 16,534 15,353 Gross profit 14,971 14,067 12,446 Sales expense 3,278 3,213 3,031 Administrative expense 7,191 6,679 5,735 Total selling and administrative expense 10,469 9,892 8,766 Interest expense 19 28 33 Other income 140 58 -103 Income before income taxes 4,623 4,205 3,544 Income tax expense 863 932 851 Net income 3,760 3,273 2,693 **Assume that all sales are on account. Below is the excerpt of Covidabravo Sdn. Bhd.’s statement of financial position’s data. 2019 2018 Assets RM (000) RM (000) Current Assets: Cash and equivalents 3,138 3,852 Short-term investments 2,319 2,072 Accounts receivable (net) 3,241 3,358 Inventories 4,838 4,337 Prepaid expenses and other current assets 1,489 1,968 Total current assets 17,464 18,174 Property, plant and equipment 3,520 3,011 Intangible assets (net) 412 412 Total Assets 21,396 21,597 BKAL1013 Business Accounting 7 The following is additional information (in thousands) related to the company: RM (000) Accounts receivable at 31 December 2017 3,117 Merchandise inventories at 31 December 2017 4,142 Total assets at 31 December 2017 18,594 Accounts payable at 31 December 2017 2,131 Total current liabilities at 31 December 2017 6,332 Stockholders’ equity at 31 December 2017 12,000 REQUIRED: (a) Determine the following measures for the fiscal years ended 31 December 2019 and 2018. Round ratios and percentages to one decimal place. (i) Accounts receivable turnover (ii) Number of days' sales in receivables (iii) Inventory turnover (iv) Number of days' sales in inventory (v) Ratio of sales to asset (b) What conclusion(s) can be drawn from each of the analysis done in part (a)? (c) Based on your answer in part (b), recommend TWO (2) potential strategies that can be used to maintain or improve the efficiency of inventory, sales and accounts receivables management to minimise the impact of Covid-19 pandemic on its profitability and cash flows.

Answer 1