Lion King was established by Mufasa and his brother Scar. A disagreement between the brothers resulted...

  

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Lion King was established by Mufasa and his brother Scar. A disagreement between the brothers resulted in Scar starting a similar business in Stellenbosch called Shadowy Palace (Shadowy Palace). Shadowy Palace sells stuffed hyenas but has been experiencing operating and cash flow difficulties due to a lack of financial planning. Scar has approached your management accounting firm to assist with the preparation of a cash budget. You were provided with the following budgeted income statement for October: Shadowy Palace Co. Forecasted Income Statement for the month ended 31 October 2019 Sales Cost of sales - - Gross profit - Opening inventory Purchases Operating expenses Closing Inventory - - Advertising Rentals Insurance - Transport costs Depreciation Interest expense Net profit Wages and Salaries R125 000 (R59 200) R3 500 R57 800 (R2 100) R65 800 (R65 080) R42 500 R100 R15 000 R3 200 R280 R4 000 (R160) R560 After a discussion with Scar, you have ascertained the following about October cash flows: 30% of sales are for cash and 25% of credit sales are collected in the month of sale. There is no existing policy on the collection of credit sales; customers pay whenever they can. In October, Scar expects to recover 10% of the outstanding trade receivables balance of R30 000 as at 30 September 2019. Inventory purchases are paid for as follows: 90% in the month of its purchase 10% in the following month Inventory to the value of R66 000 was purchased during September 2019. All operating expenses are payable in the month they are incurred, except for insurance, which is billed annually and payable on 1 January every year. O O Scar is planning to pay his friend Shezi R15 000 in October to launch a social media smear campaign to damage Lion King's reputation and consequently increase Shadowy Palace's own demand. He overheard one business accounting student at UCT calling it "corporate sabotage". Shadowy Palace Co. had an overdraft of R16 000 on 30 September 2019. Interest of 1% per month is charged on the month-end overdraft balance and payable on the 5th day of the following month. YOU ARE REQUIRED TO: 1. Prepare a cash budget for Shadowy Palace for October 2019. Your solution should include the closing bank balance for the month and indicate whether it is a positive balance or overdraft. (12 marks) Layout and presentation marks (2 marks) 2. Advise Scar on how he can improve Shadowy Palace's cash situation. (3 marks) 3. Briefly comment on whether "corporate sabotage" is a viable and sustainable solution to increase the demand for Shadowy Palace's products. (2 marks) 4. Scar normally prepares budgets which are then implemented by employees (i.e. the top-down approach). Identify a potential problem with this approach.(1 mark) Recommend an alternative to the top-down approach. (1 mark) Lion King was established by Mufasa and his brother Scar. A disagreement between the brothers resulted in Scar starting a similar business in Stellenbosch called Shadowy Palace (Shadowy Palace). Shadowy Palace sells stuffed hyenas but has been experiencing operating and cash flow difficulties due to a lack of financial planning. Scar has approached your management accounting firm to assist with the preparation of a cash budget. You were provided with the following budgeted income statement for October: Shadowy Palace Co. Forecasted Income Statement for the month ended 31 October 2019 Sales Cost of sales - - Gross profit - Opening inventory Purchases Operating expenses Closing Inventory - - Advertising Rentals Insurance - Transport costs Depreciation Interest expense Net profit Wages and Salaries R125 000 (R59 200) R3 500 R57 800 (R2 100) R65 800 (R65 080) R42 500 R100 R15 000 R3 200 R280 R4 000 (R160) R560 After a discussion with Scar, you have ascertained the following about October cash flows: 30% of sales are for cash and 25% of credit sales are collected in the month of sale. There is no existing policy on the collection of credit sales; customers pay whenever they can. In October, Scar expects to recover 10% of the outstanding trade receivables balance of R30 000 as at 30 September 2019. Inventory purchases are paid for as follows: 90% in the month of its purchase 10% in the following month Inventory to the value of R66 000 was purchased during September 2019. All operating expenses are payable in the month they are incurred, except for insurance, which is billed annually and payable on 1 January every year. O O Scar is planning to pay his friend Shezi R15 000 in October to launch a social media smear campaign to damage Lion King's reputation and consequently increase Shadowy Palace's own demand. He overheard one business accounting student at UCT calling it "corporate sabotage". Shadowy Palace Co. had an overdraft of R16 000 on 30 September 2019. Interest of 1% per month is charged on the month-end overdraft balance and payable on the 5th day of the following month. YOU ARE REQUIRED TO: 1. Prepare a cash budget for Shadowy Palace for October 2019. Your solution should include the closing bank balance for the month and indicate whether it is a positive balance or overdraft. (12 marks) Layout and presentation marks (2 marks) 2. Advise Scar on how he can improve Shadowy Palace's cash situation. (3 marks) 3. Briefly comment on whether "corporate sabotage" is a viable and sustainable solution to increase the demand for Shadowy Palace's products. (2 marks) 4. Scar normally prepares budgets which are then implemented by employees (i.e. the top-down approach). Identify a potential problem with this approach.(1 mark) Recommend an alternative to the top-down approach. (1 mark)

Answer rating: 100% (QA)

1 Prepare a Cash Budget for Shadowy Palace for October 2019 Starting Cash Balance Overdraft R16000 Cash Inflows Cash Sales 30 of R125000 R37500 Credit ... View the full answer