QUESTION 1

Grommits Ltd will commence trading in January 2021 with Share Capital of 50,000. The company will spend 140,000 on equipment. They have agreed a loan of 125,000. Repayments of principal and interest are 3,650 per month. Sales are expected to be 60,000 per month for the first three months. All sales are for cash.

Opening Inventory at the beginning of January is forecasted to be 30,000 and is paid in January. Inventory purchases are estimated to be 30% of sales each month. Suppliers are paid one month in arrears.

Wages are forecast to be 20,000 per month, payable in the month they are incurred. Salaries will be 10,000 per month payable in the month they are incurred. Overheads are forecast to be 10,000 per month and paid one month in arrears.

Rent is 28,000 per year payable annually in advance.

Required

a) Produce a Cash budget for the period January to March 2021 which shows the cash balance at the end of each month

(11 marks)

b) Discuss the cash flow problems will the company face over the next three months and how might the company deal with them?

(10 marks)

c) Discuss the difference between fixed and flexible budgets.

(4 marks)

Total: 25 marks