Problem 109 The management director of Pumpkin Ltd was reviewing the results of the company for the financial year ended 31 March 1980. The following summarized information was available: Balances as at 1 April 1989 Issued ordinary share capital: 1 fully paid shares 150,000 Share premium account 100,000 Balance of retained earnings 40,000 Balances as at 31 March 1980 Net profit for the year 19X9/XO 70,0000 Fixed assets 300,000 Bank overdraft 150,000 Other net current assets 210,000 Note: There were no other accounts with balances. The balances as at 1 April 1989 had remained unchanged throughout the year. The management 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 1980/X1 in order that the cash situation could be improved. The following information was prepared by the accountant: (1) Company sales - March 1980 Cash sales 30,000 Credit sales 65,000 In each month April to September (inclusive) the sales per month would be: Cash sales 40,000 Credit sales 70,000 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 1980: January February March Purchases 60,000 58,000 61,000 Purchases in April, May and June 55,000 in each month Purchases in July, August and September 45,000 in each month Note: the company had successfully negotiated lower prices from its supplier commencing 1 July 1980. (3) Dividends would be paid as follows: (i) Final ordinary dividend of 5p per share payable on 31 May 1980 in respect of financial year 19X9/XO. (ii) Interim ordinary dividend of 2p per share payable on 31 July 1980 in respect of financial year 19X0/X1. (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: 19X0 February, March, April 10,000 per month 19X0 May to September (inclusive) 13,500 per month 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 1980. The bonus shares would not qualify for the final dividend of 19X9/XO, but would qualify for the interim dividend to be paid on 31 July 19XO. Required: (a) Comment on the liquidity of the company as at 31 March 19X0 and explain to the managing director why a company can apparently make a good profit but have no cash in bank (b) Prepare a cash budget for each of the four months ending 31 July 1980. (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 19XO