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You are provided with information relating to Lamba Traders, a business owned by Larry Lamba - NSC Accounting - Question 6 - 2017 - Paper 1
Question 6
You are provided with information relating to Lamba Traders, a business owned by Larry Lamba. The business sells cleaning materials for cash and on credit. They deli... show full transcript
Worked Solution & Example Answer:You are provided with information relating to Lamba Traders, a business owned by Larry Lamba - NSC Accounting - Question 6 - 2017 - Paper 1
Step 1
Explain the main purpose of a Cash Budget
Answer
The main purpose of a Cash Budget is to predict the cash balances over a specific period. It enables the business to project its income and expenses, allowing management to foresee periods of cash surplus or shortage. This foresight helps in making informed financial decisions, ensuring that funds are available to meet operational needs.
Step 2
Explain the main purpose of a Projected Income Statement
Answer
A Projected Income Statement provides an estimate of the income a business expects to earn over a future period, along with the associated expenses. It serves as a tool for forecasting profitability, helping to project income for planning purposes and enabling the business to assess its financial performance objectively.
Step 3
Use the November figures to calculate the following: % of debtors that are expected to comply with the credit terms
Answer
To calculate the % of debtors that are expected to comply with the credit terms, use the formula:
ext{Percentage} = rac{ ext{Debtors Expecting to Comply}}{ ext{Total Debtors}} imes 100
Where:
- Debtors Expecting to Comply = 56 + 125 = 181
- Total Debtors = 224
Thus,
ightarrow 80.8 ext{ (approximately 81 ext ext{ extperthousand}).} $$Step 4
Step 5
Provide evidence to support his opinion: Larry does not believe that his debtors' control clerk, Shirley, deserves a bonus on 31 October 2017.
Answer
Larry's opinion is based on the fact that 58% of the amounts owed are still within the credit terms, while 42% are not complying with them. This statistic highlights that a significant portion of outstanding debt is overdue, indicating inadequate collection performance by Shirley.
Step 6
Offer Larry advice to improve debtors' collections (TWO points)
Answer
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Contact debtors through various means (phone calls, SMS, and reminders) to ensure timely payments and prompt follow-ups can reduce overdue amounts.
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Provide discounts for early payments as an incentive. This could encourage debtors to settle their accounts promptly, thus improving cash flow.
Step 7
Calculate the fixed % of sales used by Larry to budget for delivery expenses.
Answer
The fixed % of sales used by Larry for budgeting delivery expenses can be calculated as follows:
Using the information that 4% of total sales is budgeted for delivery expenses:
- Therefore, the fixed % used is 4%.
Step 8
Step 9
Explain why Larry would feel that all these variances are problems for his business.
Answer
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Cash sales are under budget, contributing to potential cash flow problems, which can hinder day-to-day operations.
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Advertising costs have been underspent, which may lead to decreased sales and recognition, impacting future growth potential.
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Any significant variances in packing materials indicate possible inefficiencies or waste in operations, affecting overall profitability.
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Delivery expenses are exceeding expectations by 9.4% of the budget, indicating rising costs that could further strain financial resources.