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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

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?

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