Chung Limited is applying for additional bank overdraft finance to enable the company to make the plant and machinery purchase described below. The directors have has asked you to draw up a cash budget for the 6 months to 30 June 2020 to prove to the bank that that overdraft finance will be repaid by 30 June 2020. The company provides you with the following financial information: Month Sales Purchases Wages Overheads £ £ £ £ November 2019 (actual) 45,800 18,400 9,600 6,000 December 2019 (actual) 34,600 13,900 9,800 14,000 January 2020 (budgeted) 42,200 16,800 10,500 7,000 February 2020 (budgeted) 44,000 17,600 11,200 7,500 March 2020 (budgeted) 54,000 21,600 13,500 18,800 April 2020 (budgeted) 57,600 23,000 14,400 8,000 May 2020 (budgeted) 61,800 24,700 15,300 9,200 June 2020 (budgeted) 63,700 25,500 15,900 9,800 Notes: The bank balance at 1 January 2020 is expected to be £25,000. 60% of sales are for cash with the other 40% being on credit. 70% of credit sales pay in the month following the month of sale with the other 30% paying 2 months after the month of sale. 50% of purchases are paid for in the month after the month in which they are made with the remainder being paid 2 months after the month in which the purchases were made. 70% of wages are paid in the current month with the other 30% (representing tax and national insurance deductions) being paid over to the taxation authorities in the following month. Overheads are paid in the month in which they are incurred. Overheads include £4,000 of plant and machinery depreciation each month. The directors of Ming Chung Limited expect to make a payment of £100,000 in January 2020 to acquire new plant and machinery. Question 1 Prepare the cash budget for Chung Limited for the 6 months ended 30 June 2020.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Chung Limited is applying for additional bank overdraft finance to enable the company to make the plant and machinery purchase described below. The directors have has asked you to draw up a cash budget for the 6 months to 30 June 2020 to prove to the bank that that overdraft finance will be repaid by 30 June 2020. The company provides you with the following financial information:

Month	Sales	Purchases	Wages	Overheads
	£	£	£	£
November 2019 (actual)	45,800	18,400	9,600	6,000
December 2019 (actual)	34,600	13,900	9,800	14,000
January 2020 (budgeted)	42,200	16,800	10,500	7,000
February 2020 (budgeted)	44,000	17,600	11,200	7,500
March 2020 (budgeted)	54,000	21,600	13,500	18,800
April 2020 (budgeted)	57,600	23,000	14,400	8,000
May 2020 (budgeted)	61,800	24,700	15,300	9,200
June 2020 (budgeted)	63,700	25,500	15,900	9,800

Notes:

The bank balance at 1 January 2020 is expected to be £25,000.
60% of sales are for cash with the other 40% being on credit. 70% of credit sales pay in the month following the month of sale with the other 30% paying 2 months after the month of sale.

50% of purchases are paid for in the month after the month in which they are made with the remainder being paid 2 months after the month in which the purchases were made.

70% of wages are paid in the current month with the other 30% (representing tax and national insurance deductions) being paid over to the taxation authorities in the following month.
Overheads are paid in the month in which they are incurred. Overheads include £4,000 of plant and machinery depreciation each month.
The directors of Ming Chung Limited expect to make a payment of £100,000 in January 2020 to acquire new plant and machinery.

Question 1

Prepare the cash budget for Chung Limited for the 6 months ended 30 June 2020.

Question 2

Discuss the steps that the directors of Chung Limited could take to fund the company’s operations if the bank refuses to agree to the required overdraft.

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