Fin621 GDB No. 2 idea solution December 2011

[Vuhelper]

Mr. Aqeel is working as “Manager Finance” for Hypothetical Manufacturing Company Limited and responsible primarily to streamline the company’s operating cash flows. At the end of year 2009 he observed a continuous pressure on the company’s operating cash flows. He discussed the matter with his personal friend who was also working as manager finance for another company. Therefore, in order to show improved cash flow position at the end year 2010 and according to his friend’s advice, he deployed all his efforts to increase the company’s sales and reduce the costs up to the minimum possible level.

Beside this operational strategy, he also obtained a long term loan of Rs. 5,000,000 @ 15% p.a. from a local bank during the year. He utilized half of the amount to purchase raw material and half of the remaining amount to pay short term obligations. During the period, he also made prepayments of worth Rs. 300,000 from cash available with the company.

Considering the above scenario, help Mr. Aqeel in exploring the ways to increase the company’s operating cash flows for the year 2010. ”

Note: Give four suggestions only in points, details are not required. Moreover your answer should not go beyond the above case.

Mr. Aqeel is working as “Manager Finance” for Hypothetical Manufacturing Company Limited and responsible primarily to streamline the company’s operating cash flows. At the end of year 2009 he observed a continuous pressure on the company’s operating cash flows. He discussed the matter with his personal friend who was also working as manager finance for another company. Therefore, in order to show improved cash flow position at the end year 2010 and according to his friend’s advice, he deployed all his efforts to increase the company’s sales and reduce the costs up to the minimum possible level.

Beside this operational strategy, he also obtained a long term loan of Rs. 5,000,000 @ 15% p.a. from a local bank during the year. He utilized half of the amount to purchase raw material and half of the remaining amount to pay short term obligations. During the period, he also made prepayments of worth Rs. 300,000 from cash available with the company.

Considering the above scenario, help Mr. Aqeel in exploring the ways to increase the company’s operating cash flows for the year 2010. ”

Note: Give four suggestions only in points, details are not required. Moreover your answer should not go beyond the above case.

[Vuhelper]

Answer

Cost Principle

From an accountant’s point of view, the term “cost” refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.



Because of this accounting principle asset amounts are not adjusted upward for inflation.



In fact, as a general rule, asset amounts are not adjusted to reflectany type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today’s market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company’s long-term assets, you will not get this information from a company’s financial statements—you need to look elsewhere, perhaps to a third-party appraiser.

[Xpert]

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