Judas has developed a plan for a rapidly expanding business selling and installing software for individuals using computers at home.

He will operate on a 100 per cent mark-up (50 per cent gross profit ratio) on the software that he sells, and will employ a team of highly paid technician/sales staff. He has piloted his business model on a number of customers and he knows that they are particularly afraid of computer viruses; he will provide a guarantee of 12 months free of viruses. But, somehow, after a year or so he knows that there will always be a return of viruses and most of his customers will request his services again. During the next 12 months he aims to build up his customer base, and make a small profit.

He has discussed his business plan with his accountant, and the following seems to be soundly based:

a Sales in January will be £220,000 and will then increase by

£20,000 per month. Customers pay two months after the sale is made.

b Suppliers are paid one month after purchases are made. Stocks amounting to £100,000 will be bought in the first month and maintained at that level. Purchases will be made each month that are sufficient to supply sales for that month.

c Wages and expenses will be £100,000 a month for the first four months of the year; then they will increase to £150,000 a month for the following three months; then they will be £200,000 a month for the next five months. They are paid during the month that they are incurred.

d At the beginning of the year he will spend £840,000 on noncurrent assets. All non-current assets are depreciated over 10 years. Depreciation is charged on a monthly basis. In June additional fixed assets of £360,000 will be bought.

His accountant advises him that, although the business should make a modest profit, there will be substantial cash outflows to begin with. She prepared a monthly budgeted income statement, and a monthly cash budget. But Judas had £1 m available to finance the business and reckoned that there would be no problem.

He refused to pay her fees and so she did not show him the monthly budgets.

Required:

i Prepare a monthly income statement for the first year of the business, showing the profit or loss each month, and for the year in total.

ii Prepare a cash budget for the year, showing the receipts and payments for each month, and the cash surplus or deficit each month.

iii Explain and comment on the results.