Accounting is the Managing Director of a very successful software publishing company. He now wants to diversify into a new area of business, Financial Services, and approaches you for advice. A copy of his Statement of Financial Position for the past two years is produced below:

Statement of Financial Position as at 31 December

Non-current Assets                                                        2020                              2019

                                                                                       £000’s                          £000’s

            Tangible assets                                               250,000                       200,000

            Less depreciation to date                               85,000                       60,000

                                                                                    165,000                       140,000

Current Assets

            Inventory                                                            7,000                            8,000

            Receivables                                                     30,000                        30,000

            Bank                                                                                                   10,000

                                                                                    37,000                        48,000

Less Current Liabilities

            Payables                                                                -                               20,000

            Bank Overdraft                                               24,000                       

                                                                                    24,000                        20,000

Net Current Assets                                                      13,000                        28,000           

Net Assets                                                                   178,000                        168,000

Capital and Reserves

            Issued Share Capital                                         150,000                         150,000

            Reserves                                                          28,000                       18,000

                                                                                     178,000                        168,000

expects current sales to continue at £30 million per month. He will continue to give one month’s credit on sales. The expected gross margin on these sales will be 20% and general overheads (excluding depreciation) are expected to be £3 million per month, payable as expensed. There is not expected to be any material difference in the working capital requirements (inventory) for the existing turnover. The tangible assets are depreciated on a straight-line basis over ten years.

On the 1^st January 2021, Sugar will issue at par, £50 million, 2% fixed interest bonds, redeemable 2029, in order to finance his new project. There is expected to be a 100% take up of the bonds. The issue will be to finance an investment of a further £45 million in tangible non-current assets and a further investment of £5 million in working capital (inventory).

The new project is expected to increase revenue initially, by a further £6 million per month but will also increase overheads by a further £4 million per month. There will be no credit given on these cash flows.    

Ignore tax and dividends.

thinks the new contract is good news for the company and will help to provide the company with good profitability and a healthy cash position.

Required:

Prepare an analysis showing his company’s forecasted cash position, Income Statement and Statement of Financial Position for the year ending 31 December 2021.

Answer rating: 100% (QA)

Statement of financial position As on 2021 Income Statement For the year ended on 2021 Cash movement ... View the full answer