Question

Jefferson Ltd is a small retail business that operates in the United Kingdom. The company was formed in December 2015 and commenced its new year on 1 January 2016 with

£25,000 in share capital. Jefferson Ltd also has £6,000 in the bank and £15,000 of finished goods stock for resale. This information had already been recorded in the accounting records of Jefferson Ltd.

The company has agreed a bank overdraft facility of up to £15,000.

The following transactions had been budgeted for the first 6 months of 2016.

Sales of goods to debtors in the 6 months to June 2016 were expected to be £160,000 in total, and transacted as follows:

		Jan	Feb	Mar	Apr	May	Jun
		£	£	£	£	£	£
Sales		20,000	18,000	20,000	25,000	32,000	45,000

Gross profit margins are always 35% of sales and it was Jefferson Ltd’s policy to have sufficient finished goods stock at the end of each month to service the following month’s cost of sales. The sales forecast for July 2016 was £55,000.

Purchases of goods for resale in the six months to June 2016, based on the above information, were £114,750 and were budgeted to be as follows:

		Jan	Feb	Mar	Apr	May	Jun
		£	£	£	£	£	£
Purchases		9,700	13,000	16,250	20,800	29,250	25,750

Other transactions:

• Plant and equipment was to be purchased for cash, £10,000, in January 2016, and £20,000 in June 2016.
• The plant and equipment depreciation for the 6 month period is included in the other operating costs, below;
• Director’s salary £2,000 per month was to be paid in cash January to June 2016;
• Sales assistant’s wages £1,000 per month was to be paid in cash January to June 2016;
• Other operating costs, £2,200 per month, include depreciation on plant and equipment, £100 per month. The cash operating expenses were to be paid in cash, each month, January to June 2016;
• Corporation tax of £652 was to be paid in June 2016;
• Bank finance charges of £15 were to be incurred in February 2016;

• Debtors were budgeted to pay in full one month after the month of the sale. In this respect sales made in January 2016, for example, would be paid for in February 2016. Debtors for December 2015 were £40,000.
• Creditors were to be paid in full, two months after the purchase of stock. In this respect purchases of stock made in January 2016 would be paid for in March 2016. Creditors for November and December 2015 were £20,000 and £30,000, respectively.
• A dividend of £1,400 was to be paid during June 2016.

Required:

1. For the 6 months period to June 2016, produce the following for Jefferson Ltd

1. A monthly cash budget;
2. A budgeted income statement for the year ended 30 June 2016; and
3. A budgeted statement of financial position as at 30 June 2016

The cash flow forecast must indicate the cash in hand or overdrawn at the end of each month.

Answer 1

Monthly Cash Budget

Particular	January	February	March	April	May	June
Receipts
Collection From Debtors	£              40,000.00	£        20,000.00	£ 18,000.00	£          20,000.00	£            25,000.00	£            32,000.00
Total Receipts (a)	£              40,000.00	£        20,000.00	£ 18,000.00	£          20,000.00	£            25,000.00	£            32,000.00
Payments
Payment to creditors for purchases	£              20,000.00	£        30,000.00	£    9,700.00	£          13,000.00	£            16,250.00	£            20,800.00
Purchase of Plant and equipment	£              10,000.00					£            20,000.00
Directors Salary	£                 2,000.00	£           2,000.00	£    2,000.00	£             2,000.00	£              2,000.00	£              2,000.00
Sales Assisstants Wages	£                 1,000.00	£           1,000.00	£    1,000.00	£             1,000.00	£              1,000.00	£              1,000.00
Cash Operation Cost (2200 - 100)	£                 2,100.00	£           2,100.00	£    2,100.00	£             2,100.00	£              2,100.00	£              2,100.00
Corporation Tax						£                  652.00
Bank Finance Charges		£                 15.00
Dividend Paid						£              1,400.00
Total Payments (b)	£              35,100.00	£        35,115.00	£ 14,800.00	£          18,100.00	£            21,350.00	£            47,952.00
Net Receipts / (Payments) = a - b	£                 4,900.00	-£        15,115.00	£    3,200.00	£             1,900.00	£              3,650.00	-£           15,952.00
Bank Balance at start	£                 6,000.00	£        10,900.00	-£   4,215.00	-£            1,015.00	£                  885.00	£              4,535.00
Bank Balance at end	£              10,900.00	-£          4,215.00	-£   1,015.00	£                885.00	£              4,535.00	-£           11,417.00
Overdraft Facility utilised		£           4,215.00	£    1,015.00			£            11,417.00

Budgeted Income Statement for 6 Months ending June 2016

Particular	Amount
Sales	£ 160,000.00
Less: Cost of Sales	£ 104,000.00
Gross Margin	£    56,000.00
Less : Expenses
Directors Salary	£    12,000.00
Sales Assisstants Wages	£      6,000.00
Cash Operation Cost (2200 x 6)	£    13,200.00
Corporation Tax	£          652.00
Net Operating Income	£    24,148.00
Less : Finance Charges	£            15.00
Operating income	£    24,133.00
Less : Dividend Paid	£      1,400.00
Amount taken to Balance Sheet	£    22,733.00

Budgeted Statement of Financial Position as at 30 June 2016

Particular	Amount
Current Assets
Bank Balance	£                   -
Accounts Receivable	£    45,000.00
Finished Goods Inventory (See Note -1)	£    35,750.00
Total Current Assets	£    80,750.00
Fixed Assets
Plant and Equipment	£    30,000.00
Accumulated Depreciation	£          600.00
Net Fixed Assets	£    29,400.00
Total Assets	£ 110,150.00
Current Liabilities
Accounts Payable	£    65,000.00
Bank Overdraft	£    11,417.00
Total Current Liability	£    76,417.00
Shareholders Equity
Share Capital	£    25,000.00
Carried forward Profit and Loss (See Note – 2)	-£   14,000.00
Net Income	£    22,733.00
Total Shareholders Equity	£    33,733.00
Total Liabilities & equity	£ 110,150.00

Note - 1 Finished Good Inventory Budget

Particular	January	February	March	April	May	June
Sales	£ 20,000.00	£ 18,000.00	£ 20,000.00	£ 25,000.00	£ 32,000.00	£ 45,000.00
Cost of Sales @ 65%	£ 13,000.00	£ 11,700.00	£ 13,000.00	£ 16,250.00	£ 20,800.00	£ 29,250.00
Opening Stock	£ 15,000.00	£ 11,700.00	£ 13,000.00	£ 16,250.00	£ 20,800.00	£ 29,250.00
Purchases	£    9,700.00	£ 13,000.00	£ 16,250.00	£ 20,800.00	£ 29,250.00	£ 35,750.00 *
Cost of Sales	£ 13,000.00	£ 11,700.00	£ 13,000.00	£ 16,250.00	£ 20,800.00	£ 29,250.00
Closing Stock	£ 11,700.00	£ 13,000.00	£ 16,250.00	£ 20,800.00	£ 29,250.00	£ 35,750.00 *

* Calculation of Closing Stock For Month of June 2016

Expected Sales Forecast for the month of July 2016 = 55,000

Cost of Sales @ 65% = 35,750

Therefore, Closing Inventory required for June 2016 as per policy = 35,750

Purchases for June 2016 = 25,750 + 10,000 (additional Purchases) = 35,750

Note - 2) Calculation of Opening Balance of Profit and Loss Account

Particular	Amount
Bank Balance	£    6,000.00
Finished Goods Inventory	£ 15,000.00
Accounts Receivable	£ 40,000.00
Total Assets (a)	£ 61,000.00
Accounts Payable	£ 50,000.00
Share Capital	£ 25,000.00
Total Liabilities & equity (b)	£ 75,000.00
Balance in Profit and Loss Account = a-b	-£ 14,000.00