DD LTD

DD Ltd operates a business to do with warehousing and distribution of books and CDs for K Ltd, an on-line business. For this purpose, DD rented warehouses in each major town in the country and the actual delivery of orders was outsourced to a courier service. The market was becoming increasingly competitive and the year ending 31 December 2015 had not been as successful as the previous years. The founder and CEO was very frustrated with the complex integrated computer system that dealt with all the logistics. The system is down most of the time; as a result, money is lost through lost business and poor service delivery.

The CEO has is of the view that there is real fear that K Ltd may penalize the company or indeed engage another company in the place of DD. A lot of money is spent on computer consultants who practically live at DDs offices and what is worse they do not appear to make any difference.

Since the logistical system was linked to the general ledger, all the problems had been making meaningful reporting and financial management extremely difficult. This has caused the DD accountant to quit just before year end and in desperation he had come to you for help. The bookkeeper extracted the following information for the year ending 31 December 2015 and forwarded it to you (all accounts are to be prepared to the nearest K1000):

1. K Ltd was DDs only customer and all sales were made on credit. DD processed 1.62 million orders during the year and charged K Ltd K20 per order fulfilled.
2. The delivery charge paid to the courier was treated as the cost of goods sold and it was K6.50 per order
3. At the time of setting up DD K20 million ordinary shares of par value K1 per share were issued. There has been no further share issue since then.
4. General and administrative expenses for the year were worth K6.2 million
5. Selling and marketing expenses were estimated at 2% of sales.
6. The non-current assets consisted of IT infrastructure and warehouse equipment. They were valued at K57.63 million after depreciation expense for the year of K4.34 million
7. There was no long-term loan or overdraft. Hence there was no interest expense in the year.
8. K Ltd takes a long time to settle its accounts and as at year end was taking 56.7 days to settle their account.
9. The goods in the DD s warehouse belonged to K Ltd. Packaging material and consumables on hand at 31 December 2015 were valued at K0.420 million.
10. Retained earnings b/f on 1/1/2015 was K50.948 million.
11. The couriers were owed K0.610 million at 31/12/2015.
12. Company income tax rate was 25% and company dividend policy was to pay half the earnings after tax as dividend.
13. The CEO knew that they had a lot of money in the bank at the year end, had not received the bank statement and no reconciliation statement had been prepared.

The CEO wanted you not only to finalise the accounts for the year ending 31/12/2015 but also needed serious advice about the financial implications of ideas he had for the following year. The large IT company that supplied and supported the IT infrastructure had approached him with a proposal. They suggested that DD sell them the system and outsource the entire function to them. He really liked the idea of getting rid of this headache and would need the cash if he was going to explore his other ideas. For the last two years DD had not been happy with the property developers who leased the warehouse to DD. The CEO felt that they were too expensive and did not honour the accepted responsibilities of a landlord. He had spoken to them and discovered that as landlords they were in fact keen to get out of industrial property altogether. They offered to sell the buildings to DD for a reasonable price and the CEO liked the idea of not being held at ransom by them in the future. It was however a big decision for him to make and would necessitated DD borrowing quite a lot of money for the first time ever. After discussions with you and his operating team, he asked you to prepare a budget projection based on the following information:

• Transaction volume would increase by 30%. K Ltd were not prepared to put up their rate, so it would remain at K20 per order fulfilled
• DD would sell their IT infrastructure for its book value of K34.8 million and the outsourced service provider would charge them a flat fee of K1 per transaction
• Cost of sales would rise to K7.50 per transaction as the IT cost of K1 would be added to the existing delivery charge of K6.50 which would not change from last year
• The warehouses would be purchased for an amount of K92 million and to help fund this CEO had sourced a long-term loan of K54 million. The interest on this loan would be K6.83 million for the year
• The warehouses were not going to be depreciated at all, so the charge for the year ended 31/12/2016 would drop to K2.77 million
• Stock levels were predicted to increase to K0.72 million by year end
• The tax rate and company divided policy were not expected to change
• The CEO was determined to manage the K Ltd account better during the following year and felt that he could get their average time to payment down to 51.5 days. However, as the delivery courier was pushing for even earlier payment the CEO felt that it would be prudent to budget creditors as exactly the same nominal value as last year
• General and administrative costs would be reduced to K4.2 million for the year and this would enable the CEO to up marketing expenses to 4% of sales. He felt that it was a good idea to for him to look for new clients to reduce his dependency on K Ltd and help utilize spare capacity
• The CEO still did not want to have an overdraft and wondered what cash position the above scenario would leave the company with.

ASSIGNMENT 4

H Company limited is making a cash forecast for the forthcoming period. Its financial year ends on 31 December. The following information is available regarding the companys operations.

1. Management believes the 2016 sales levels and pattern are a reasonable estimate of the 2017 sales. Sales in 2016 were as follows:

2016	K000
January	360
February	420
March	600
April	540
May	480
June	400
July	350
August	550
September	500
October	400
November	600
December	800
Total	6,000

2. The accounts receivable at 31December 2016 total K380, 000. Sales collections are generally made as follows:

During month of sale 60%

In first subsequent month 30%

In second subsequent month 9%

Uncollectable 1%

(c) The purchase cost of good averages 60% of the selling price. The cost of the stock on hand at 31 December 2016 is K 840,000, of which K30,000 is obsolete. Arrangements have been made to sell the obsolete stock in January at half the normal selling price on cash on delivery basis. The company wishes to maintain the stock, as of the first of each month, at a level of three months sales as determined by the sales forecast for the next three months.

All purchases are paid for on the tenth of the following month. Accounts payable for purchases at 31 December 2016 total K370, 000.

(d) Payments in respect of expenses (fixed and variable) are forecast for the first three months of 2017 as follows:

K000

January 160.62

February 118.80

March 158.40

(e) It is anticipated that cash dividends will of K40, 000 will be paid each half year, on the fifteenth day of March and September.

(f) During the year unusual advertising costs will be incurred that will require cash payments of K10, 000 in February and K15, 000 in March. The advertising costs are in addition to the expenses in item (d) above.

(g) Equipment replacements are made at a rate which requires a cash outlay of

K3, 000 per month. The equipment has an average estimated life of 6 years.

(h) A K60, 000 payment for income tax is to be made on 31 March 2017.

(i) At 31 December 2016 the company had a bank loan with an unpaid balance of

K280, 000. The entire balance is due on 31 March 2017, together with accumulated interest from January 2017 at the rate of 12% p.a.

(j) The cash balance at 31 December 2016 is K100, 000.

Required

Prepare a cash budget, by months, for the four months of the 2017 financial year.

The budget should show the amount on hand (or deficiency of cash) at the end of each month.

Show all workings and supporting schedules.

Due on 17/11/2019