Question

The following contains a 3 part question, first question in done by me, assistance required in the second question (Statement of Financial Position), third question will be asked later in a separate request.

Rita Mc Govern is starting her business in the hair care industry by launching Wonderful Hair Day (WHD). She has undertaken some initial analysis of the market and believes that she can sell 9,000 units of the WHD in the first 3 months of business. She is confident that she can achieve a 5% growth in sales for each of the remaining 3 quarters of the year.

The WHD will sell at $20 per unit and she is confident that she can negotiate a price with a supplier that will give her a gross margin of 25%, (that is the Cost of Sales will be 75%). In order to get this price from suppliers, she will have to agree to payment terms that require her to pay for purchases in one month. Sales will be to the business community and will therefore all be on credit. In order to develop sales in the early days of the business, Rita will give 2 months credit to customers.

Rita expects to have $60,000 to invest in the business, but will also seek a loan of $20,000 from the bank with interest rate of 8% per annum. She will pay “interest only” for the first year of business and this will equate to $1,600, paid quarterly. The bank agreed to allow Rita to run an overdraft of $35,000 for the first six months. You are not required to charge interest on the overdraft.

On day one, Rita will buy the fixed assets required to run the business and will pay $40,000 up front for those assets. She will spend the remaining cash $40,000 on initial inventory. As stated above all subsequent purchases will be on credit with 1 month to pay. The inventory levels will remain constant at $40,000 which means that the purchases = cost of sales.

The fixed assets acquired on day one will be depreciated at a rate of 20% which equals $8,000 per annum. Expenses and overheads will be paid as incurred and are estimated to be $5,000 in Q1, and will increase at a rate of 5% per quarter thereafter.

Corporation tax is charged at a rate of 12.5% on profits, but the tax will only be paid in the last quarter (end of year).

There will be no distribution on profits on a quarterly basis and all profits will be fully retained in the business.

She had brought her business idea to the bank who gave her provisional approval based on the information provided The bank has now asked for the income statement, Statement of Financial position, and Cash Budget drawn up quarterly rather than a monthly basis. A total or annual budget should also be provided.

Assume that Rita will commence business on Jan 1^st 2019, where the loan will be drawn down and her investment funds will be lodged in the business bank account.

Rita Mc Govern is starting her business in the hair care industry by launching Wonderful Hair Day (WHD). She has undertaken some initial analysis of the market and believes that she can sell 9,000 units of the WHD in the first 3 months of business. She is confident that she can achieve a 5% growth in sales for each of the remaining 3 quarters of the year.

The WHD will sell at $25 per unit and she is confident that she can negotiate a price with a supplier that will give her a gross margin of 25%, (that is the Cost of Sales will be 75%). In order to get this price from suppliers, she will have to agree to payment terms that require her to pay for purchases in one month. Sales will be to the business community and will therefore all be on credit. In order to develop sales in the early days of the business, Rita will give 2 months credit to customers.

Rita expects to have $60,000 to invest in the business, but will also seek a loan of $20,000 from the bank with interest rate of 8% per annum. She will pay “interest only” for the first year of business and this will equate to $1,600, paid quarterly. The bank agreed to allow Rita to run an overdraft of $35,000 for the first six months. You are not required to charge interest on the overdraft.

On day one, Rita will buy the fixed assets required to run the business and will pay $40,000 up front for those assets. She will spend the remaining cash $40,000 on initial inventory. As stated above all subsequent purchases will be on credit with 1 month to pay. The inventory levels will remain constant at $40,000 which means that the purchases = cost of sales.

The fixed assets acquired on day one will be depreciated at a rate of 20% which equals $8,000 per annum. Expenses and overheads will be paid as incurred and are estimated to be $5,000 in Q1, and will increase at a rate of 5% per quarter thereafter.

Corporation tax is charged at a rate of 12.5% on profits, but the tax will only be paid in the last quarter (end of year).

There will be no distribution on profits on a quarterly basis and all profits will be fully retained in the business.

She had brought her business idea to the bank who gave her provisional approval based on the information provided The bank has now asked for the income statement, Statement of Financial position, and Cash Budget drawn up quarterly rather than a monthly basis. A total or annual budget should also be provided.

Assume that Rita will commence business on Jan 1^st 2019, where the loan will be drawn down and her investment funds will be lodged in the business bank account.

Income Statement (done)

Budgeted Income Statement on Quarterly Basis 01 02 03 04 Revenue (5% increase / quarter) Cost Gross profit 180000 135000 45000 189000 141750 47250 198450 148837.5 49612.5 208372.5 156279.375 52093.125 Expenses (5% increase / quarter) Depreciation Interest Operating income 5000 2000 400 37600 5250 2000 400 39600 5512.5 2000 400 41700 5788.125 2000 400 43905 Tax @ 12.5% 4700 4950 5212.5 5488.125 Net income 32900 34650 36487.5 38416.875

Required : Statement of financial position ( balance sheet )

Answer 1

Solution :-

It has been assumed that interest on bank loan for $ 1,600 will be paid in the 2nd year.