a) Prepare a cash budget for the 3 months period February to April. b) Discuss the cash budget in (a) stating any concerns you would have about the figures and any steps the management of Gray Ltd could take to improve the company's cash flow position. (200 words) c) Explain why a business should prepare a cash budget.
a) Prepare a cash budget for the 3 months period February to April. b) Discuss the cash budget in (a) stating any concerns you would have about the figures and any steps the management of Gray Ltd could take to improve the company's cash flow position. (200 words) c) Explain why a business should prepare a cash budget.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Question 1
The following data has been extracted from the operating budgets of
Gray Ltd for 2023. The company manufactures shoes for sale to
large retailers shop and in its own high street shops:
Income from
high street shop
sales
Month
Income
Raw material
Labour
Overheads
from sales
purchases
to retailer
£
January
£
£
255,000
90,000
232,500
97.500
5,500
February 262,500
232,500
112,500
225,000
90,000
5,500
March
75,000
232,500
97,500
8,200
67,500
April
May
232,500
236,250
108,750 8,400
150,000
71,250
225,000
105,000 9,500
1. It is estimated that approximately 75% of cash from sales to
retailers is received at the time of sale and 25% is received one
month later. It is also agreed with the retailer that 5% of May
sales will be paid one month in advance.
2. Sales in the high street shops are all in cash and received at the
time of sale.
3. The company rents out one of its stores. It is going to receive
cash rent income of £6,000 in April 2023.
4. 60% of payments for raw materials are made in the month of
purchase, 40% one month later.
5. Labour costs are paid in full at the end of each month.
6. A new machine costing £120,000 is to be acquired on 28th
February. The new machine will be paid for in 3 equal monthly
instalments beginning in March.
7. Monthly overheads are paid one month after they are
incurred and include £3,700 of depreciation. The monthly
depreciation amount will increase by £4,000 in March 2023 due
to the purchase of the new machine.
8. The opening bank balance on 1st February 2023 is forecast to be
£130,000. The company is also forecast to have £20,000 in cash
on 1st February 2023.
Required
a) Prepare a cash budget for the 3 months period February to April.
b) Discuss the cash budget in (a) stating any concerns you would
have about the figures and any steps the management of Gray
Ltd could take to improve the company's cash flow position.
(200 words)
c) Explain why a business should prepare a cash budget.
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