Question
Rachel Brown is setting up her own retailing business with 10,000 of her own capital. She will also be borrowing a further 30,000 from her
Rachel Brown is setting up her own retailing business with 10,000 of her own capital. She will also be borrowing a further 30,000 from her local bank in order to fund the business through its initial first year of trading. The bank manager has asked Rachel to provide him with a Business Plan that includes a forecast Income Statement and Statement of Financial Position for the first year of trading.
Rachel has asked you to help her draw up these statements and provides you with the following information:
Sales are expected to be 20,000 per month. The gross margin on sales is expected to be 25%. She will give two month's credit to her customers. However, she will only receive one months credit on her purchases. Furthermore, she would like to purchase sufficient goods for resale so as to have a closing inventory by the end of the year valued at 15,000 at cost, and payment was made immediately.
She will take out a lease on some shop premises. The lease will cost 12,000 per year payable monthly, one month in advance. Shop fittings are expected to cost 50,000 but are estimated to last five years. She will have to pay the full amount for these as soon as they are delivered.
General running expenses of the shop are expected to be 1,000 per month, payable as incurred. Rachel will work in the shop herself and would like to draw 1,200 per month out of the business to cover her own living expenses.
The loan will be repayable in equal monthly instalments over five years. The interest payable on the loan will be 2,000 per year.
Required:
- Prepare an analysis of Rachel's cash position at the end of the first year of trading. (5 marks)
- Prepare Rachel's forecast Income Statement and Statement of Financial Position for the first year of trading. (10 marks)
- Comment on the expected results after the first year of trading paying particular attention to Rachel's cash position and gearing level. (5 marks)
- Discuss the accounting concepts used to produce the income statement and explain why profit is different to cash. (5 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started