The directors of Style-X Ltd (Style-X), and external audit client of your firm, are planning to expand the business. The expansion is to be funded by borrowings and the directors have been negotiating

  

The directors of Style-X Ltd (Style-X), and external audit client of your firm, are planning to expand the business. The expansion is to be funded by borrowings and the directors have been negotiating with the company’s bankers in order to increase borrowings. The directors have prepared profit and cash flow forecasts for the three years ending 31 March 20X2 in support of the request for funding. The company’s bankers require this information to be reviewed and reported on by independent accountants and the board of directors has requested that your firm undertakes this review. Style-X designs and sells high quality home accessories and clothing which are sold by mail order and over the internet. Customers pay for goods at the time of order and the company operates a policy whereby customers who are not satisfied with any purchase entitled to a full refund if they return the product, undamaged, within three months of receipt. In recent years, the level of return has been approximately 8% if revenue. All products are made exclusively for Style-X by suppliers based in the Malaysia and overseas. It is company policy to pay all suppliers 10 working days following the week of delivery of the goods. The company currently operates from a warehouse in Shah Alam, but the directors wish to expand the business by opening retail outlets in cities throughout Malaysia so that customers can see and touch the products they are buying. The directors have identified three potential properties, in the premier shopping areas of Kuala Lumpur, Bangi and Johor Bahru. These are leasehold properties with rent payable quarterly in advance. The directors intend to have the properties fitted out to a very high standards in line with the company’s corporate image and will use specialist contractors to undertake this work. There will be electronic point-of-sales systems and customers will be able to pay by cash, credit or debit cards. Each outlet will be run by a manager heled by a mixture of full and part-time staff. One of the company’s objectives is to provide a high level of service and knowledgeable advice to its customers and the company aims to reflect this in the staffing levels and remuneration of its employees. All outlet staff, including managers, will be aid at rates above those paid by other companies in the retail sector and will be eligible for an annual bonus linked to the performance of the outlet.1. From the information provided above, identify the specific matters you would consider when reviewing the reasonableness of the assumptions underlying the receipts and payments included in the cash flow forecast for the three years ending 31 March 20X2.

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