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You are provided with information relating to Lamba Traders, a business owned by Larry Lamba - NSC Accounting - Question 6 - 2017 - Paper 1
Question 6
You are provided with information relating to Lamba Traders, a business owned by Larry Lamba. The business sells cleaning materials for cash and on credit. They deli... show full transcript
Worked Solution & Example Answer:You are provided with information relating to Lamba Traders, a business owned by Larry Lamba - NSC Accounting - Question 6 - 2017 - Paper 1
Step 1
Explain the main purpose of a Cash Budget and a Projected Income Statement.
Answer
The main purpose of a Cash Budget is to predict cash balances or cash flow for a specific period. It helps the business to plan and forecast its receipts and payments effectively.
A Projected Income Statement, on the other hand, aims to provide an estimate of the profits that are expected to be earned during a specified period by projecting income and expenses.
Step 2
Use the November figures to calculate the following:
Answer
- % of debtors that are expected to comply with the credit terms:
To calculate the percentage of debtors expected to comply with credit terms, use the formula:
ext{Percentage} = rac{ ext{Credit Sales Complied}}{ ext{Total Credit Sales}} imes 100
From the November figures:
ext{Percentage} = rac{125 + 56}{224} imes 100 = 81 ext{\%}
- % of bad debts expected:
To find the percentage of bad debts, use the formula:
ext{Percentage of Bad Debts} = rac{ ext{Total Bad Debts}}{ ext{Total Credit Sales}} imes 100
Using the figures:
ext{Percentage of Bad Debts} = rac{56}{224} imes 100 = 25 ext{\%}
Step 3
Larry does not believe that his debtors' control clerk, Shirley, deserves a bonus on 31 October 2017. Provide evidence to support his opinion. Offer Larry advice to improve debtors' collections (TWO points).
Answer
Larry's opinion is supported by data from the Age Analysis, which indicates that 58% of amounts owed are still within the credit terms while 42% are not complying with terms. This suggests that Shirley is not efficiently managing the debtors' collections.
Advice to improve collections:
- Contact debtors through statements, phone calls, or SMS reminders to encourage timely payments.
- Implement stricter credit control measures, such as more thorough screening processes to avoid extending credit to unreliable customers.
Step 4
Step 5
Explain why Larry would feel that all these variances are problems for his business.
Answer
Larry may view variances as problematic because:
- Cash sales are reportedly over budget, which could indicate cash flow issues that may disrupt daily operations.
- Advertising costs were under-spent, potentially leading to a decline in sales or brand awareness, which could affect revenue.
- Mismanagement in packing materials has led to increased costs, further straining the financial resources of the business.
- Variances in delivery expenses show an increase that can affect profitability, as these costs were higher than initially projected.