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Retro Ltd is preparing to set up business on 01/07/2016 and has made the following forecast for the first six months of trading: Sales July 420,000 August 440,000 September 500,000 October 620,000 November 625,000 December 590,000 Total 3,275,000 Purchases July 180,000 August 220,000 September 260,000 October 265,000 November 340,000 December 370,000 Total 1,635,000 (i) The expected selling price is €50 per unit - Leaving Cert Accounting - Question 9 - 2015
Question 9
Retro Ltd is preparing to set up business on 01/07/2016 and has made the following forecast for the first six months of trading: Sales July 420,000 Au... show full transcript
Worked Solution & Example Answer:Retro Ltd is preparing to set up business on 01/07/2016 and has made the following forecast for the first six months of trading: Sales July 420,000 August 440,000 September 500,000 October 620,000 November 625,000 December 590,000 Total 3,275,000 Purchases July 180,000 August 220,000 September 260,000 October 265,000 November 340,000 December 370,000 Total 1,635,000 (i) The expected selling price is €50 per unit - Leaving Cert Accounting - Question 9 - 2015
Step 1
Prepare a cash budget for six months July to December 2016
Answer
To create the cash budget, we first need to ascertain:
Receipts
-
Cash Sales Receipts:
- Calculate cash sales for each month based on the sales forecast and the cash customers' collection pattern.
- For example, in July: Cash Sales = 20% of €420,000 = €84,000; Adjust for discount: €84,000 - 5% = €79,800.
-
Credit Sales Collection:
- Month 1 Collection: 80% from Credit customers collected 50% in the month after.
- Month 2 Collection: 80% collected in the second month after.
Payments
-
Purchases Payments:
- Similar to receipts, split the purchases based on the credit supplier conditions (50% in the month after, 50% in the second month).
-
Other Payments:
- Wages, variable and fixed overheads, and interest on the bank loan will be added each month as required.
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Determine Net Cash:
- Subtract total payments from total receipts to find net cash for each month.
Summary Table:
| Month | Cash Sales | Credit Sales (1 month) | Credit Sales (2 months) | Total Receipts | Purchases | Wages | Overheads | Total Payments | Net Cash |
|---|---|---|---|---|---|---|---|---|---|
| July | 79,800 | - | - | 251,600 | 180,000 | 60,000 | 65,000 | 305,000 | -53,400 |
| August | 88,400 | 176,000 | - | 454,200 | 220,000 | 60,000 | 65,000 | 345,000 | 109,200 |
| September | 100,000 | 180,000 | 176,000 | 602,000 | 260,000 | 60,000 | 65,000 | 385,000 | 217,000 |
| October | 125,000 | 180,000 | 220,000 | 625,000 | 265,000 | 60,000 | 65,000 | 390,000 | 235,000 |
| November | 130,000 | 200,000 | 150,000 | 590,000 | 340,000 | 60,000 | 65,000 | 465,000 | 125,000 |
| December | 120,000 | 192,000 | 196,000 | 602,000 | 370,000 | 60,000 | 65,000 | 495,000 | 107,000 |
| Total | 703,200 | 928,000 | 982,000 | 2,525,000 | 1,635,000 | 360,000 | 390,000 | 2,685,000 | -60,000 |
Step 2
Prepare a budgeted profit and loss account for the six months ended 31/12/2016
Answer
Budgeted Profit and Loss Account
-
Sales:
- Total Sales = €3,275,000
-
Less Cost of Sales:
- Purchases = €1,635,000
- Cost of Sales Calculation:
- Include direct costs such as materials, labor, and overheads at a rate of variable overheads.
-
Gross Profit:
- Gross Profit = Sales - Cost of Sales
- Gross Profit = €3,275,000 - €1,635,000 = €1,640,000
-
Expenses:
- Wages = €360,000 (6 months)
- Variable Overheads = €390,000 (6 months)
- Fixed Overheads = €390,000 (6 months)
- Total Expenses = €1,140,000
-
Net Profit Calculation:
- Net Profit = Gross Profit - Total Expenses
- Add discount received and account for depreciation.
- Deduct any interest payable on loans to find net profit.
Summary Table:
| Item | Amount (€) |
|---|---|
| Total Sales | 3,275,000 |
| Less Cost of Sales | 1,635,000 |
| Gross Profit | 1,640,000 |
| Less Expenses | 1,140,000 |
| Net Profit | 500,000 |
Step 3
On the cash budget how you have prepared what advice would you give the management of Retro Ltd?
Answer
Prepared Cash Budget Analysis
- Cash Surplus: Retro should invest surplus cash in short-term investment opportunities for maximum returns. This can help pay off loans or cover fixed costs more effectively.
- Cash Deficit: If a cash deficit is anticipated, it’s crucial for Retro Ltd to seek immediate alternative financing sources, such as extending credit terms with suppliers or negotiating bank overdrafts.
Advice to Management
- Revise Payment Terms: Consider establishing better credit terms with customers to enhance cash flow and follow up on outstanding invoices promptly.
- Expense Management: Analyze fixed and variable expenses; find avenues to trim unnecessary costs.
- Encourage Cash Payments: Offering discounts for upfront cash payments could improve liquidity, particularly in July and August when shortages are projected.
- Revisit Capital Expenditure: Delay non-essential capital expenditures until a more stable cash flow is observed.
By implementing these strategies, Retro Ltd can better manage its cash flow and ensure stability in its operations.