Question
The summarised statement of financial position of Leila Ltd as at 31 May 2020 is as follows: 100071 Current assets Bank 20,000 AR 200,000 Inventory
The summarised statement of financial position of Leila Ltd as at 31 May 2020 is as follows:
100071 | |||
Current assets | |||
Bank | 20,000 | ||
AR | 200,000 | ||
Inventory | 86,000 | ||
Total current assets | 306,000 | ||
NCA [net of depreciation] | 154,000 | ||
Total assets | 460,000 | ||
Current liabilities | |||
AP | 72,000 | ||
Accruals [wages] | 3,800 | ||
Accruals [expenses] | 2,500 | ||
Total current liabilities | 78,300 | ||
Capital and reserves | 381,700 | ||
Total liabilities and equity | 460,000 |
Accounts payable represent purchases for May, and accounts receivable the sales for April and May at $100,000 per month.
The directors are seeking finance from a bank and have produced the following profit forecast, but the bank, before deciding, has asked for a cash budget for the period showing the maximum anticipated finance needed from month to month. The profit forecast for the next six months is:
100071 | Jun | Jul | Aug | Sep | Oct | Nov |
Sales | 180,000.0 | 220,000.0 | 240,000.0 | 262,000.0 | 262,000.0 | 260,000.0 |
Gross profit | 45,000.0 | 55,000.0 | 60,000.0 | 65,500.0 | 65,500.0 | 65,000.0 |
Wages and salaries | 20,000.0 | 18,000.0 | 24,000.0 | 27,000.0 | 32,000.0 | 24,000.0 |
Rent | 1,670.0 | 1,670.0 | 1,660.0 | 1,670.0 | 1,670.0 | 1,660.0 |
Other expenses | 8,000.0 | 10,000.0 | 12,000.0 | 12,000.0 | 10,000.0 | 15,000.0 |
Profit | 15,330.0 | 25,330.0 | 22,340.0 | 24,830.0 | 21,830.0 | 24,340.0 |
Stock requirement at month end | 90,000.0 | 80,000.0 | 120,000.0 | 100,000.0 | 112,000.0 | 170,000.0 |
Further information is given below:
- At each month-end, one-eighth of a month’s wages and salaries, and a quarter of other expenses, would be outstanding.
- Rent at the rate of $20,000 per annum is payable quarterly in arrears on 31 August, 30 November, etc.
- Assume that one month’s credit will be taken on purchases as previously, and that accounts receivable will continue to take two months’ credit.
- New fixed assets (additional) will be delivered in June and must be paid for on 31 August; cost $200,000.
- If the bank grants finance, it will continue an existing $50,000 overdraft facility, and give a five-year loan of a fixed amount as soon as necessary to maintain the overdraft within its limit for the whole period under review.
You are required to:
[a] prepare the cash budget for the period of June – November 2020.
[b] prepare a summary statement of financial position as at 30 November 2020.
[c] Calculate current ratios at the beginning and at the end of the period.
Discuss if the change in these ratios could affect the firm’s ability to obtain short-term loans from the bank.
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