Mtoto Ltd operate as wholesale ‘cash and carry’ stores and in addition to its main store have two other depots. The company’s summarised balance sheet as at 31 August 20X1 was as follows.

• Over the past year the company has experienced increased competition and as a consequence reported a net trading loss for the year ended 31 August 20X1.
• The company has decided that in the new financial year tighter control must be exercised over cash resources.

The following information is available:

1. All goods are purchased by the main store.

• Mtoto Ltd pays suppliers two months after the month of purchase.
• Forecast purchases are being reduced since the managing director regarded current stock levels as too high.
• In addition, shop-soiled stock which cost £20,000 is to be sold for cash in October. It is anticipated that this stock will be sold for £17,000. This sale is not included in the sales of note 2 below.

2. All sales are on a cash basis only except for several important customers who trade only with Mtoto’s main store.

3. Mtoto Ltd pays £9,500 fixed overhead costs per month.

4. Wages and salaries are paid each month through a centralised payroll system.

In October, 10 staff were made redundant and are to receive their redundancy compensation of £12,000 in December. This amount is not included in the above figures.

5. Other variable overhead charges are paid by Mtoto Ltd in the month following the month they are incurred.

6. Plant surplus to requirement is to be sold in September for £26,500 cash. The plant cost £55,000 and depreciation to date is £20,000.

Required:

(a) A detailed cash budget, on a month by month basis, for the first four months of the financial year ending 31 December 20X1 for Mtoto Ltd.

(b) A report commenting on:

(i) The current and forecast liquidity position.

(ii) The action that Mtoto Ltd could take to attempt a return to a profit situation.

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Fixed assets (at net book value) Current assets Stock Trade debtors E 399,900 21,000 3 549,600 420,900 970,500 Authorised and issued capital 450,000 £1 Ordinary shares Fully paid Retained earnings at 1 Sept 20X0 Less Current year ended 31 Aug 20X1 loss Current liabilities Trade (and other) creditors Bank overdraft £ 300,000 (130,000) 110,500 240,000 £ 450,000 170,000 350,500 970,500