Goliath plc is a food wholesaler. The most recent financial statements of the business are as follows:

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 rise to £1,668,000 during the next year as a result of these changes. To finance the increase in inventories and trade receivables, the business will increase the settlement period taken from suppliers 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 £120,000 a year and administration costs will rise by 15 per cent.

Required:

(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 yearend figures)

(ii) net investment in inventories, trade receivables and trade payables (iii) profit for the period.

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

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Sales revenue Cost of sales Opening inventories Purchases Closing inventories Gross profit Administration expenses Selling expenses Operating profit Interest payable Profit before taxation Taxation (25%) Profit for the period Income statement for the year to 31 May Trade receivables Cash at bank ASSETS Non-current assets Property, plant and equipment Current assets Inventories Total assets Statement of financial position as at 31 May £000 550.0 1,450.0 2,000.0 (560.0) £000 2,400.0 (1,440.0) 960.0 (300.0) (436.0) 224.0 (40.0) 184.0 (46.0) 138.0 £000 456.4 560.0 565.0 36.4 1,161.4 1,617.8