The managing director of Pumpkin Ltd was reviewing the results of the company for the financial year ended 31 March 2010. The following summarised information was available:

There were no other accounts with balances. The balances as at 1 April 2009 had remained _unchanged throughout the year.
The managing director was pleased that the company had made a good profit, but he was rather concerned that a healthy bank balance at the beginning of the year had now become a large bank overdraft.
Consequently he asked the company accountant to prepare forecast information for 2010/11 in order that the cash situation could be improved.
The following information was prepared by the accountant:

1 Company sales — March 2010

In each month April to September (inclusive) the revenue per month would be:

All credit sales are settled the month after the sale.
2 All goods purchased are from a single supplier. The goods are purchased on credit and each month's purchases are paid for three months after the month of purchase.
The following purchase schedule had been prepared for the first 9 months of 2010:

The company had successfully negotiated lower prices from its supplier commencing 1 July 2010.
3 Dividends would be paid as follows:
(i) Final ordinary dividend of 5p per share payable on 31 May 2010 in respect of financial year 2009/10.

(ii) Interim ordinary dividend of 2p per share payable on 31 July 2010 in respect of financial year 2010/11.
4 Selling and distribution expenses are expected to be 6 per cent of a given month's total sales. They are paid one month in arrears.
5 Administration charges would be incurred as follows:

Administration charges are settled two months after the month in which they were incurred.
6 The company had decided to make a bonus issue of shares of one share for every three held. The issue would be made on 30 April 2010. The bonus shares would not qualify for the final dividend of 2009/10, but would qualify for the interim dividend to be paid on 31 July 2010.

Required:

(a) Comment on the liquidity of the company as at 31 March 2010 and explain to the managing director why a company can apparently make a good profit but have no cash in the bank.

(b) Prepare a cash budget for each of the four months ending 31 July 2010.

(c) Comment on the forecast bank balance as shown by your cash budget. Identify ways in which the bank overdraft could be reduced over the last five months of 2010.

Transcribed Image Text:

Balances as at 1 April 2009 Issued ordinary share capital: 3 1 fully paid shares 150,000 Share premium account 100,000 Balance of retained earnings 40,000 Balances as at 31 March 2010 Net profit for year 2009/10 70,000 Fixed assets 300,000 Bank overdraft 150,000 Other net current assets 210,000