Reference no: EM133497182

Case: Remesh owns and manages 12,000 hectares of forestland. The company generates revenue from selling timber to a local sawmill. Demand for wood products has expanded due to the recent growth of overseas markets, and the company's management has therefore decided to increase its harvest rate. In January 2023, Remesh sells 1,000 units (measured in cubed meters - m3) of timber to the sawmill and plans to raise its delivery volume in increments of 600 units each month through the end of 2023 (and thus sell 1,600 units in February, 2,200 units in March, etc.). The sawmill promises $2,580,000 for the total amount of timber (51,600 units) to be delivered in 2023 according to this projection, payable in twelve equal monthly installments, beginning in January. If Remesh delivers less than the projected amount of timber, it must make a proportional refund to the sawmill at the end of the year. To fulfill its obligations, Remesh just signed a contract to outsource all logging and hauling operations to a new third-party contractor, LGR Inc., who charges $60 per unit of timber harvested. The contractor will bill Remesh at the beginning of each month for the work completed during the prior month. To maintain a good relationship with LGR Inc., Remesh always pays these invoices promptly (that is, during the month the invoise was received). As of January 1, 2023, the ledger of Remesh shows a cash balance of $10,000 and a balance in accounts payable (to a previous contractor - ASZ Ltd.) for work done in 2022, of $210,000. During January, the company receives the first installment payment from the sawmill and pays all outstanding accounts payable to ASZ Ltd. in full. The controller of Remesh expresses concerns after reviewing the company's performance in January, but the treasurer seems confident: "Looking at the results of one month alone can be misleading."

In February, the sawmill remits the second monthly payment to Remesh. 1600 units of timber are delivered, as projected, and the contractor, LGR Inc., sends an invoice for the 1,000 units harvested in January, which Remesh pays immediately. Operations continue according to plan in March (and no changes in future plans are anticipated as of March 31, 2023).

Questions:

a. Prepare the operating section of the cash flow statement of Remesh for the months of January, February and March. Use the direct method and show beginning and ending cash balances in your answer. Include only the transactions described above. No need to reconcile with the net income.

b. Prepare accrual-basis income statements for Remesh for the months of January, February and March. Consider only the transactions described above and ignore income taxes.

c. Evaluate the company's performance, with respect to cash flow and income.

d. Suppose that the logging contractor, LGR Inc., offered Remesh an extra 60 days to pay its invoices. Evaluate the usefulness of this offer given the company's current situation you analyzed in part c above. If it is not useful, recommend an alternative solution.