BUDGETING EXERCISE

PREPARING A SIMPLE SET OF BUDGETS

Situation:

C and K are planning to start a business selling reconditioned aircraft engines.

They will buy their stock from an airline, recondition the engines and sell them on to small charter airlines.

They have agreed to buy at a fixed price of $3,000$ and the sellers can supply as many as they need in the short term.

They plan to start their venture in January, and spend January and February preparing their first engines for sale.

They have estimated as best they can and the sales levels for the coming months are as follows:

Estimated sales in:

March

$2$ engines

April

$3$ engines

May

$4$ engines

June

$4$ engines

July

$4$ engines

August

$4$ engines

The sales will all be on a cash basis for $5,000$ each.

Purchases of the engines will also be for cash, but the parts to re$-$condition the engines $($estimated at $400$ per engine$)$ will be supplied on one month's credit.

They will buy the necessary parts at the same time as the engines.

They plan to buy $3$ engines in January and build up their stocks so that by the end of February and each following month there will be enough engines ready for sale to satisfy the estimated demand of the following $2$ months.

C and K have found suitable premises with a workshop, the rent is $4,000$ per year, payable annually in advance. They will immediately equip the workshop with tools costing $1,000,$ which should last about $4$ years.

Other costs of running the business are estimated at $400$ per month, all payable in the month that they are incurred.

C and K have put together $20,000$ cash as initial capital, and hope that any further finance required can be provided by a temporary bank overdraft facility.

They will each draw $800$ from the business per month in the first year

Required:Draft a set of master budgets and cash budget $($cash flow forecast$)$ for the first $6$ months of the business and comment on the state of the business.

STEP $1$:

Work out how many engines they will need to purchases each month to comply with their stock requirements.

This is useful information for the main budgets and for the cash budget.

Month Opening Stock Purchases Sales Closing Stock

January

February

March

April

May

June

TOTAL

STEP $2$:

Prepare the Budgeted Income Statement $($Profit &

Loss$)$ for the first $6$ months

Sales

Less cost of engines sold

Gross Profit

Less Expenses:

Budgeted Net Profit

STEP $3$:

Prepare the Cash Budget

DETAILS

Jan Feb March April May June

RECEIPTS:

Capital

Invested

Cash Sales

TOTAL

RECEIPTS

PAYMENTS

Engines

Parts

TOTAL

PAYMENTS

SUMMARY

Opening Bank $0$

Balance

Add Receipts

Less Payments

Closing Bank

Balance

STEP $4$: Prepare the Budgeted Balance Sheet as at the end of June $2010$

$($pound $)($pound$)($pound$)$

Depreciation NBV Cost

Fixed Assets

Current Assets:

Less Current Liabilities

Working Capital

Net Assets

Financed By:

Capital

Plus: $?$

Less?