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Aisling Ltd - Leaving Cert Accounting - Question 9 - 2007
Question 9
Aisling Ltd. is preparing to set up business on 1/7/2007 and has made the following forecast for the first six months of trading: Sales July: 425,000 August: 440,00... show full transcript
Worked Solution & Example Answer:Aisling Ltd - Leaving Cert Accounting - Question 9 - 2007
Step 1
Prepare a cash budget for the six months July to December 2007.
Answer
To prepare the cash budget:
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Calculate Cash Receipts:
- Cash Sales: 30% of each month's sales revenue.
- Credit Sales: 70% of sales, with 50% collected in the month after and 50% in the second month after.
Example for July:
- Cash Sales: 30% of €425,000 = €127,500.
- Credit Sales in July: 70% of €425,000 = €297,500 (50% collected in August and 50% in September).
Continuing this for all months will yield total cash receipts.
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Calculate Cash Payments:
- Purchases: 50% paid in the month after the purchase with a 2% discount.
- Expected costs: Wages, variable and fixed overhead payments.
- Capital costs consideration for equipment.
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Net Monthly Cash Flow Calculation:
- Subtract total cash payments from total cash receipts for each month.
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Bank Loan Adjustment:
- Add or remove any bank loan amounts as applicable.
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Calculate Closing Balance:
- Beginning balance + net cash flow = closing balance for the month.
This process will outline the cash budget across the six months.
Step 2
Prepare a budgeted Profit and Loss Account for the six months ending 31/12/2007.
Answer
A cash budget is a financial plan that estimates cash inflows and outflows over a specific period, typically used to manage liquidity effectively.
Advantages:
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Forecasting Availability of Cash:
- It highlights periods when cash will be available or lacking, allowing proactive financial management.
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Short-Term Investments:
- Helps in identifying surplus cash that can be temporarily invested for additional income, optimizing the company's finance.