Levi Ackerman decided to resign from his current job and start his own café. He is investing $50,000 of his own money and took out a business loan worth $100,000. Levi handed in his resignation in May 2021, purchased and fully paid for an established café costing $109,000 in June 2021, and plans to open shop on 1 July 2021. Additional information: Annual depreciation for the non-current assets taken over from the previous owner totals $18,000. Additional equipment costing $5,000 were purchased and paid for in June. These equipment are depreciated on a straight-line basis and have an expected useful life of ten years with no residual value. Assume that monthly payment for the loan is $780, of which $240 relates to interest payment and the remainder relates to principal repayment. One month’s credit is received from inventory suppliers and Levi will utilise this payment term, paying the amounts owed one day before it is due. Inventories costing $4,000 are acquired in June 2021. Subsequent monthly purchases will be at a level that replaces forecasted sales for the month. A 40% mark-up is added onto the cost of inventory to determine the selling price (i.e., sales as a percentage of cost of sales is 140%). Forecasted monthly sales are $22,400 for July, $25,200 for August and September, and $30,800 from October onwards. Assume any credit sales are paid within the month of sale. Operating expenses, excluding cost of sales and depreciation of non-current assets, are estimated at $5,400 per month. Levi intends to make monthly cash drawings of $1,000. Required: Prepare a cash budget for the six months ended 31 December 2021. (Can have a month in each column. Start with the opening balance, then cash receipts, cash payments, net cash flow and closing balance). Prepare an income statement for the six months ended 31 December 2021. Assume a 30% tax rate.

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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Levi Ackerman decided to resign from his current job and start his own café. He is investing $50,000 of his own money and took out a business loan worth $100,000. Levi handed in his resignation in May 2021, purchased and fully paid for an established café costing $109,000 in June 2021, and plans to open shop on 1 July 2021.

Additional information:

Annual depreciation for the non-current assets taken over from the previous owner totals $18,000.
Additional equipment costing $5,000 were purchased and paid for in June. These equipment are depreciated on a straight-line basis and have an expected useful life of ten years with no residual value.
Assume that monthly payment for the loan is $780, of which $240 relates to interest payment and the remainder relates to principal repayment.
One month’s credit is received from inventory suppliers and Levi will utilise this payment term, paying the amounts owed one day before it is due. Inventories costing $4,000 are acquired in June 2021. Subsequent monthly purchases will be at a level that replaces forecasted sales for the month.
A 40% mark-up is added onto the cost of inventory to determine the selling price (i.e., sales as a percentage of cost of sales is 140%).
Forecasted monthly sales are $22,400 for July, $25,200 for August and September, and $30,800 from October onwards. Assume any credit sales are paid within the month of sale.
Operating expenses, excluding cost of sales and depreciation of non-current assets, are estimated at $5,400 per month.
Levi intends to make monthly cash drawings of $1,000.

Required:

Prepare a cash budget for the six months ended 31 December 2021. (Can have a month in each column. Start with the opening balance, then cash receipts, cash payments, net cash flow and closing balance).
Prepare an income statement for the six months ended 31 December 2021. Assume a 30% tax rate.

Definition Definition Estimate of an organization's cash flow for a future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future.

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