Question

Smith Ltd. is to be incorporated on 1 July. The opening balance sheet of the business will then be as follows Assets Cash at bank 100.000 Owner's equity Share capital 100.000 (€1 ordinary shares) During July, the business intends to make payments of € 30.000 for a motor vehicle and € 15.000 for fixtures and fittings. The business will also purchase initial trading inventories costing € 20.000 on credit. The business has produced the following estimates: a) Sales revenue in July will be € 20.000 and will increase at the rate of € 3.000 a month until October In November, sales revenues will rise to € 40.000 and in subsequent months will be maintained at this figure. b) The gross profit percentage on goods sold will be 30% c) There is a risk that supplies of trading inventories will be interrupted towards the end of the accounting year. The business therefore intends to build up its initial level of inventories (€ 20.000) by purchasing € 300 worth of inventories each month in addition to the monthly purchases necessary to satisfy monthly sales requirements. All purchases of inventories (including the initial inventories) will be on one month credit. d) Sales revenue will be divided equally between cash and credit sales. Credit customers are expected to pay one month after the sale is agreed. e) Wages and salaries will be € 900 a month. Other overheads will be € 200 a month for the first three months and € 500 thereafter. Both types of expenses will be payable when incurred. f) The business intends to purchase equipment in December for € 6.000 cash. g) Depreciation is to be provided at the rate of 5% a year on fixtures and fittings and the motor vehicle and 15% a year on equipment. Depreciation has not been included in the overheads mentioned in e). Required: Prepare a cash budget for Smith Ltd. for the six month period to 31 December.

Answer 1

CASH BUDGET OCTOBER NOVEMBER PARTICULARS JULY AUGUST SEPTEMBER DECEMBER Opening Cash Balance (1) 100.00 27.00 -2.60 19.45 12.80 4.05 INCOME Cash Sales 10.00 11.50 13.00 14.50 20.00 20.00 Credit Sales 10.00 11.50 13.00 14.50 20.00 Gross Profit % as Cash Profit (2) 3.00 6.45 7.35 8.25 10.35 12.00 EXPENSES 30.00 Motor Vehicle Furniture & Fixtures 15.00 Initial Inventories 20.00 9.00 Wages & Salaries 9.00 9.00 9.00 9.00 9.00 Overheads 2.00 2.00 2.00 5.00 5.00 5.00 Equipment 6.00 Depreciation Supporting Inventory TOTAL EXPENSE (3) 3.00 3.00 3.00 3.00 3.00 76.00 14.00 14.00 17.00 17.00 23.00 ENDING CASH BALANCE (1+2-3) -13.60 27.00 19.45 12.80 4.05 -2.60 * No Depreciation effect because it is non cash expenditure and cash budget is being prepared. * Supporting inventory 3 per month is taken and taken at credit of one month. * The figures are not given in specific currency properly. Hence all answers are on basis of hundreds. Sales Calculation:- July Aug Nov Dec Sept Oct Sales 20.00 23.00 26.00 29.00 40.00 40.00 Cash Sales 10.00 11.50 13.00 14.50 20.00 20.00 Credit Sales 10.00 11.50 13.00 14.50 20.00 20.00 * Credit sales are at one month credit and hence will be recovered in subsequent month. gross profit % will be applied on total sales for cash budget.