Trial Question1

During a class discussion Mr. Folivi intended to started a business to be known as Knightsbridge EnterpriseHe provides you with the following information:

1. His fixed deposit is having a present value of GH6,000. This will be the beginning cash for the purpose of his intended business.

2. Mr. Folivi was promised sales orders amounting to GH54,000 and GH90,000 respectively for the first two quarters of 2021. From July onwards, sales are expected to be steady at the rate of GH150,000 per quarter. Customers will be given two months grace period to make payment.

3. He will maintain inventory of goods costing GH40,000 which have to be delivered in December 2020 if the business is to start in January 2021.

4. The goods will be sold, on average, at a gross profit margin of 20%.

5. A motor vehicle will be purchased and paid for in January 2021 for GH15,000. It is expected to last for 5 years and be worth about GH5,000 at the end of that period.

6. Mr. Folivi will arrange for monthly supplies of goods sufficient to replace items sold. The supplier will allow two months credit for all supplies, including the initial stocks to be delivered in December 2020.

7. He will conduct most of his business from home but will rent a warehouse to store the goods. He will pay 2 years rent of GH4,800 payable half yearly in equal amounts for the two years commencing January 2021.

8. A Sales Executive will be engaged with a quarterly salary of GH1,000 payable monthly.

9. Telephone bill and electricity are expected to be GH200 and GH300 respectively on quarterly basis. Other relevant expenses are estimated at GH400 per quarter payable in cash.

10.Mr. Folivi will require his bank to meet all his other cash needs if the business is undertaken.

Prepare:

(i) A cash budget for each of the four quarters of 2021for Knightsbridge Enterprise

(ii) A budgeted income statement for the year 2021 for Knightsbridge Enterprise