ML is a rapidly growing company that produces luxury food for upmarket cat owners. The owner and
Question:
ML is a rapidly growing company that produces luxury food for upmarket cat owners. The owner and director, Mr. P, is trying to produce a cash flow forecast to ensure he can afford to invest in a brand-new cat food machine that will be installed in his factory in Northern Ireland. The purchase of the cat food machine will cost £150,000, and Mr. P intends to buy it for cash in March.
ML has retail customers from its own private shop as well as large supermarket contracts. These customers pay by cash or credit. On average 20% of customers pay by cash while the remaining customers pay by credit. Of the credit customers, one-quarter pay in the current month, and the remaining three-quarters of credit customers pay one month after the sale.
As Mr. P believes the root of his success is the ingredients in the food, he ensures he keeps good relations with the suppliers and tries to pay them in the month of purchase. In reality, he pays 80% in the month of purchase and the balance one month after the purchase. The extension of credit for those he pays one month late carries an additional interest charge of 2% on the balance which is paid at the same time.
Months | Sales £ | Purchases £ | Expenses £ |
Jan | 100000 | 55000 | 16000 |
Feb | 120000 | 60000 | 13000 |
Mar | 200000 | 80000 | 14000 |
Apr | 250000 | 100000 | 15000 |
Within expenses, Mr P includes £5,000 per month of salary costs, which are paid at the end of the month in which they are incurred. The remaining expenses are paid one month after they are incurred and include depreciation of £1,000 per month. The deprecation relates to a retail van which was bought at £34,000 (cost). It is depreciated monthly on a straight-line basis.
On 1 February ML has an opening overdraft balance of £20,000 and an approved overdraft limit of £35,000.
Required:
(a) Prepare a monthly cash budget for the period February to April inclusive.
(b) Using the results of your cash budget, explain what Mr. P could do to resolve any overdraft overruns that may arise.
(c) Using four examples from the question or from your cash budget, why there are differences between items included in the cash budget and those included in the income statement.
Auditing a business risk appraoch
ISBN: 978-0324375589
6th Edition
Authors: larry e. rittenberg, bradley j. schwieger, karla m. johnston