The managing director of Pumpkin Ltd was reviewing the results of the company for the financial year ended 31 March 2013. The following summarised information was available:

Balances as at 1 April 2012 Issued ordinary share capital:

$£ 1$ fully paid shares Share premium account Balance of retained earnings Balances as at 31 March 2013 Net profit for year 2012/13 Non-current assets Bank overdraft Other net current assets $£$

150,000 100,000 40,000 70,000 300,000 150,000 210,000 Note: There were no other accounts with balances. The balances as at 1 April 2012 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 2013/14 in order that the cash situation could be improved.

The following information was prepared by the accountant:

1 Company sales - March 2013 Cash sales 30,000 Credit sales 65,000 In each month April to September (inclusive) the sales per month would be:

\begin{tabular}{lc}

& $£$ \\

Cash sales & 40,000 \\

Credit sales & 70,000

\end{tabular}

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 2013:

\begin{tabular}{lrrr}

Purchases & \begin{tabular}{l}

January \\

$£ 60,000$

\end{tabular} & \begin{tabular}{r}

February \\

$£ 58,000$

\end{tabular} & \begin{tabular}{r}

March \\

$£ 61,000$

\end{tabular} \\

Purchases in April, May and June & & \\

$£ 55,000$ in each month & & \\

Purchases in July, August and September & \\

$£ 45,000$ in each month & &

\end{tabular}

Note: The company had successfully negotiated lower prices from its supplier commencing 1 July 2013.

3 Dividends would be paid as follows:

(i) Final ordinary dividend of 5 per share payable on 31 May 2013 in respect of financial year 2012/13.

(ii) Interim ordinary dividend of 2 p per share payable on 31 July 2013 in respect of financial year 2013/14.

4 Selling and distribution expenses are expected to be $6 \%$ of a given month's total sales. They are paid one month in arrears.

5 Administration charges would be incurred as follows:
\begin{tabular}{ll}
2013 February, March, April & $£ 10,000$ per month \\
2013 May to September (inclusive) & $£ 13,500$ per month \end{tabular}
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 2013. The bonus shares would not qualify for the final dividend of 2012/13, but would qualify for the interim dividend to be paid on 31 July 2013.
\section*{Required:}

(a) Comment on the liquidity of the company as at 31 March 2013 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 2013.

(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 2013.
(AQA (Associated Examining Board): GCE A-level)