In: Accounting
In-Class Activity 3 Financial Planning
Garrity and Chawla Electronic Ltd is a small business to be formed by Philip and Hitesh to sell a range of products from an electronic shop in a shopping mall in Hamilton. On 1 September 2018, they plan to invest $60,000 cash to acquire 30,000 $1 shares each in the business. Of this, $25,000 is to be invested in new fittings and equipment in September. These fittings and equipment are to be depreciated over five years on the straight-line basis (their scrap value is assumed to be $5,000 at the end of their lives). The straight-line basis of depreciation allocates the total amount to be depreciated evenly over the life of the asset. In this case, a half-year’s depreciation is to be charged in the first six months.
The sales and purchases projections for the business are as follows:
September 2018 $ |
October 2018 $ |
November 2018 $ |
December $ |
January 2019 $ |
February 2019 $ |
Total |
|
Sales revenue |
15,300 |
45,900 |
45,900 |
61,200 |
61,200 |
76,500 |
306,000 |
Purchases |
30,000 |
45,000 |
37,500 |
37,500 |
45,000 |
45,000 |
240,000 |
Other Costs* |
13,500 |
13,500 |
13,500 |
13,500 |
13,500 |
13,500 |
81,000 |
Dividends |
20,000 |
20,000 |
|||||
Equipment |
10,000 |
10,000 |
|||||
*Other Costs includes wages but excludes depreciation |
The sales will all be made by credit card. The credit card business will take one month to pay and will deduct its fee of 2 per cent of gross sales before paying amounts due to Garrity and Chawla Electronics Ltd. One month’s credit is allowed by their suppliers.
Other costs shown above do not include rent of $10,000 per quarter, payable on 1 September and 1 December. All other costs will be paid in cash. The two shareholders decided that a dividend payment of $20,000 ($10,000 each) was appropriate to be paid in the month of February as a reward for their investment in the company. Philip and Hitesh also decided that the business required additional equipment of $10,000 to be spent in February so that they can commence using this additional equipment at the beginning of March 2019.
Closing inventory at end of February is expected to be $87,000. Ignore taxation for this question. Where necessary, round calculations to the nearest dollar ($).
Required:
(c) Does the Garrity and Chawla Electronic Ltd have cash flow problems? Identify what may be causing any problems and briefly discuss ways in which the business might be able to improve its cash flows.