Progress Stores: Preparation of budget financial

statements

Brief for a Managing Director

You are Managing Director of Progress Stores, a rapidly expanding company specialising

in medium sized stores, selling a wide variety of low-price consumer goods including food

products.

It is now December and time for preparation of the budget for the next financial year,

which begins on 1 January. Next year is to be a particularly vital one for the company, as

the plan is to increase the number of stores from their present number of eight to

twelve by the purchase of four new stores during the year. In addition to this expansion,

there are also plans to modernise three of the existing stores.

You have put aside this afternoon to work on the first draft prior to a management team

meeting this evening. Unfortunately the Chief Accountant who promised you the figures

by lunchtime is fog-bound at t h e Cape Town Airport.

Accordingly you are calling the management team together to have a go at doing it

yourselves. Each manager has the relevant information for his/her particular area of the

business and together with the attached draft accounts for the current year you have all

the information needed to prepare the budget Statement of Comprehensive Income and

Statement of Financial Position (SOFP) for the next financial year.

Your own particular contribution to the budget is in respect of the activities over which

you personally have control, selling/advertising and distribution.

Selling/advertising costs for the year just ending will be R320,000. With the new store

expansion, however, much new advertising and sales promotion is necessary, so you

expect this cost to rise to R600,000 in the budget year. All this will be cash outlay, there

being no credit available for this type of cost.

Because of the cash flow problems likely to be created by the expansion, you are not

purchasing any new vehicles and will fill any gaps by hiring. This extra cost, together with

increased drivers wages and maintenance costs, will push up distribution costs by

R120,000 compared with this years level. This figure includes R50,000 of depreciation

on existing lorries and vans which will need to be deducted from the vehicles figure on

the SOFP.

You have now asked the management team to come along to your office with all the

relevant information. You expect everyone to do their bit and help in the budget

preparation.

Brief for a Stores Director

You are Stores Director of Progress Stores, a rapidly expanding company specialising in

medium-sized stores, selling a wide variety of low-price consumer goods including food

products.

It is now December and time for preparation of the budget for the next financial year,

which begins on 1 January. Next year is to be a particularly vital one for the company, as

the plan is to increase the number of stores from their present number of eight to twelve

by the purchase of four new stores during the year. In addition to this expansion, there

are also plans to modernise three of the existing stores.

There is a management team meeting this evening to discuss next years budget. You

have provided the relevant information to the Chief Accountant and you expected to

receive your first draft figures by lunchtime. Unfortunatelythe Chief Accountant is fogbound

at Cape Town Airport with the only copy, and the managing director wants you

and the rest of the management team to have a go at putting the figures together

yourselves.

In your own role, you have the following information about next years plans:

The expansion programme in existing stores and general price inflation will increase

sales by R5.8m. In addition the new stores opened during the year will further push

up sales by R2.7m.

Quite obviously this increase in sales is going to mean the recruitment of extra staff

and this will push up total wages and salary costs by R620,000. Other stores costs are

also bound to rise and they will total R1,120,000 next year, which includes R300,000

depreciation on furniture and fittings. This depreciation will need to be deducted

from the cost of Fixtures and Fittings on the SOFP.

One innovation coming next year is the launch just before Christmas of your own

credit card. Credit sales of R400,000 are included in the above total sales figure, and

this revenue will not have been received by the end of the financial year. You will

therefore need to include a trade receivable balance in the SOFP for the first time.

The managing director has now asked you to go along to his/her office with all the

relevant information. He/she expects everyone to do their bit and help in the budget

preparation.

Brief for a Purchasing Director

You are Purchasing Director of Progress Stores, a rapidly expanding company specialising

in medium- sized stores, selling a wide variety of low-price consumer goods including

food products.

It is now December and time for preparation of the budget for the next financial year,

which begins on 1 January. Next year is to be a particularly vital one for the company, as

the plan is to increase the number of stores from their present number of eight to

twelve by the purchase of four new stores during the year. In addition to this expansion,

there are also plans to modernise three of the existing stores.

There is a management team meeting this evening to discuss next years budget. You

have provided the relevant information to the Chief Accountant and you expected to

receive your first draft figures by lunchtime. Unfortunatelythe Chief Account is fogbound

at Cape Town Airport with the only copy, and the managing director wants you

and the rest of the management team to have a go at putting the figures together

yourselves.

In your own role, you have the following information about next years plans:

With the increased sales level, you are obviously going to have to step up the

purchasing programme. Forecasts from the Stores Director indicate that purchases

for next year will have to be R17.8m, which is based on a closing inventory level at

stores and distribution depots of R4.1m.

There have been some problems this year with suppliers who have been worried by

rumours that the company was over-stretching itself and having cash problems.

Although the Managing Director assured you that all was well, he/she has asked you

to pay bills more quickly next year and reduce the trade payables (now at about two

and a half months) to R2m by the end of the year (about 41 days).

You have also taken charge of the detailed arrangements of the new store openings

and shop fittings in existing stores. Purchase of property for new stores will be R2.5m

in the year and shop fittings in these stores will cost R720,000. Shop fittings in existing

stores will cost a further R580,000.

The Managing Director has now asked you to go to his/her office with all the relevant

information. He/she expects everyone to do their bit and help in the budget preparation.

Brief for a Resources Director

You are Resources Director of Progress Stores, a rapidly expanding company specialising

in medium- sized stores, selling a wide variety of low-price consumer goods including

food products.

It is now December and time for preparation of the budget for the next financial year,

which begins on 1 January. Next year is to be a particularly vital one for the company, as

the plan is to increase the number of stores from their present number of eight to

twelve by the purchase of four new stores during the year. In addition to this expansion,

there are also plans to modernise three of the existing stores.

There is a management team meeting this evening to discuss next years budget. You

have provided the relevant information to the Chief Accountant and you expected to

receive your first draft figures by lunchtime. Unfortunatelythe Chief Accountant is fogbound

at Cape Town Airport with the only copy, and the managing director wants you

and the rest of the management team to have a go at putting the figures together

yourselves.

In your own role, you have the following information about next years plans:

You are responsible for administration and head office costs which will not rise to the

same extent as other costs because of their fixed nature, but general inflation and

recruitment of one or two new staff will increase them by R60,000.

You have also dug out the following further details which will be useful:

The loan will remain in place next year and the interest rate payable on the longterm

loan will remain at R300,000.

Tax for budgeting purposes is taken at 35% of profit before tax.

The estimated tax for next year will be a liability in the SOFP at the year-end.

The share capital will remain at R3,000,000 next year.

You are unsure of the bank balance at the end of the next year to include in the SOFP,

however you know that the SOFP must balance so it can be put in as a balancing

figure until the Chief Accountant returns and completes a detailed cash flow

statement.

The Managing Director has now asked you to go to his/her office with all the relevant

information. He/she expects everyone to do their bit and help in the budget preparation.

Progress Stores

Statement of Comprehensive Income This Year

R000

Sales 16,000

Cost of sales

Opening inventory 2,800

Purchases 10,960

13,760

Less closing inventory (3,200)

(10,560)

Gross Profit 5,440

Staff wages and salaries (2,080)

Other store costs (780)

Selling and advertising costs (320)

Administration and head office costs (280)

Distribution costs (340)

(3,800)

Operating Profit 1,640

Finance cost (300)

Profit before tax 1,340

Taxation (470)

Profit for the year 870

Henley MBA Programme MFR Workshop activities Page 9

Progress Stores

Statement of Financial Position This Year

R000

Non-Current Assets

Land & buildings 7,200

Furniture & fittings 630

Vehicles 180

8,010

Current Assets

Inventory 3,200

Cash 200

3,400

Total Assets 11,410

Equity

Share capital 3,000

Retained profits 2,830

5,830

Non- Current liabilities

Loan 2,810

Current Liabilities

Trade payables 2,300

Tax payable 470

2,770

Total Equity and Liabilities 11,410

Question:

1,Create a statement of Cash flow statement for the next year 2020 year.

Progress Stores

Cash Flow Statement Next Year

R000 R000

Cash In

Opening balance

200

Sales

Less Credit card sales not yet received

Cash out

Payments to creditors

Staff wages

Other store costs (less depreciation)

Selling and advertising costs

Administration and Head office costs

Distribution costs (less depreciation)

Loan Interest

Capital expenditure

Shop Fitting

New stores

Taxation - last year

Overdraft required (balancing figure)

(3,240)