uestion 2 Ralph starting trading on 1st March The opening st

uestion 2 Ralph starting trading on 1st March. The opening statement of financial position of the business is as follows Assets Cash at bank Capital and liabilities Owner\'s capital 75,000 75,000 During March, the business intends to make the following payments: a three month rental payment of £24,000 for a property, a payment of £13,500 for equipment and a payment of £7,000 for a motor vehicle. The business will also purchase initial trading inventories costing £22,500 on one month\'s credit. The business has produced the following estimates Sales revenue for March will be £10,000 and will increase at the rate of £1,000 per month until May. In June sales revenue will rise to £16,000 and in subsequent months will be maintained at this figure Sales revenue will be divided between 60% for cash and 40% on credit. Credit customers are expected to pay two months after the sale is agreed 2 3. The cost of goods sold (purchases) will be 75% of their sales value (25% gross 4.Wages and salaries will be £1,400 per month. Other overhead costs will be £900 5.The business intends to purchase further equipment in Aug for £9,000 cash but profit). Purchases will be made each month to satisfy the sales in that month and they will be paid for one month later per month for the first four months and £950 thereafter. Both types of expense will be payable in the month in which they are incurred will take out a bank loan of £10,000 in May to help pay for this Depreciation will be provided at the rate of 20% per year on equipment and vehicles on the straight line basis. Depreciation has not been provided in the overheads detailed in point 5 above Required: (a) Prepare a cash forecast for Ralph for the six-month period March to August (30 marks) (b) Explain why cash forecasts are useful and important for businesses (5 marks)

Solution

SOLUTION A:-

CASH BUDGET FOR THE PERIOD MARCH TO AUGUST

* depreciation shall not be considered in cash budget because it is a non - cash expense.

solution B:-

IMPORTANCE OF CASH BUDGETS IN BUSINESS:-

1.it helps to maintain a minimum level of cash that would certainly help the organisation for sooth poperations of their business and maintaining liquidity.

2.it determines the requirements of short term funds that is needed for the purpose to meet any cash deficit for working capital management.

3.it helps the companies to determine the credit period that could be extended to customers without any shortage of cash.

PARTICULARS	MARCH	APRIL	MAY	JUNE	JULY	AUGUST
opening balance	75000	34200	8500	9150	11850	11900
INFLOWS:-
cash sales	10000*60%=6000	11000*60%=6600	12000*60%=7200	16000*60%=9600	16000*60%=9600	16000*60%=9600
collection from debtors	.	.	10000*40%=4000	11000*40%=4400	12000*40%=4800	16000*40%6400
bank loan						10000
OUTFLOWS:-
purchases	.	10000*75%=7500	11000*75%=8250	12000*75%=9000	16000*75%=12000	16000*75%=1200
wages and salary	1400	1400	1400	1400	1400	1400
overhead costs	900	900	900	900	950	950
property	24000
equipment	13500					9000
motor vehicle	7000
inventory		22500
closing balance	34200	8500	9150	11850	11900	25350