The summarised statement of financial position of Leila Ltd as at 31 May 2020 is as follows:

100071
Current assets
Bank	20,000
AR	200,000
Inventory	86,000
Total current assets	306,000
NCA [net of depreciation]	154,000
Total assets		460,000
Current liabilities
AP	72,000
Accruals [wages]	3,800
Accruals [expenses]	2,500
Total current liabilities	78,300
Capital and reserves	381,700
Total liabilities and equity		460,000

Accounts payable represent purchases for May, and accounts receivable the sales for April and May at $100,000 per month.

The directors are seeking finance from a bank and have produced the following profit forecast, but the bank, before deciding, has asked for a cash budget for the period showing the maximum anticipated finance needed from month to month. The profit forecast for the next six months is:

100071	Jun	Jul	Aug	Sep	Oct	Nov
Sales	180,000.0	220,000.0	240,000.0	262,000.0	262,000.0	260,000.0
Gross profit	45,000.0	55,000.0	60,000.0	65,500.0	65,500.0	65,000.0
Wages and salaries	20,000.0	18,000.0	24,000.0	27,000.0	32,000.0	24,000.0
Rent	1,670.0	1,670.0	1,660.0	1,670.0	1,670.0	1,660.0
Other expenses	8,000.0	10,000.0	12,000.0	12,000.0	10,000.0	15,000.0
Profit	15,330.0	25,330.0	22,340.0	24,830.0	21,830.0	24,340.0
Stock requirement at month end	90,000.0	80,000.0	120,000.0	100,000.0	112,000.0	170,000.0

Further information is given below:

1. At each month-end, one-eighth of a month’s wages and salaries, and a quarter of other expenses, would be outstanding.
2. Rent at the rate of $20,000 per annum is payable quarterly in arrears on 31 August, 30 November, etc.
3. Assume that one month’s credit will be taken on purchases as previously, and that accounts receivable will continue to take two months’ credit.
4. New fixed assets (additional) will be delivered in June and must be paid for on 31 August; cost $200,000.
5. If the bank grants finance, it will continue an existing $50,000 overdraft facility, and give a five-year loan of a fixed amount as soon as necessary to maintain the overdraft within its limit for the whole period under review.

You are required to:

[a] prepare the cash budget for the period of June – November 2020.

[b] prepare a summary statement of financial position as at 30 November 2020.

[c] Calculate current ratios at the beginning and at the end of the period.

Discuss if the change in these ratios could affect the firm’s ability to obtain short-term loans from the bank. 

Answer rating: 100% (QA)

Cash budget for the period of June November 2020 Amount in Answer Cash in the beginning Cash receive... View the full answer