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 hisresignation in May 2021, purchased and fully paid for an established café costing $109,000 inJune 2021, and plans to open shop on 1 July 2021.Additional information:• Annual depreciation for the non-current assets taken over from the previous ownertotals $18,000.Additional equipment costing $5,000 were purchased and paid for in June. Theseequipment are depreciated on a straight-line basis and have an expected useful life often years with no residual value.Assume that monthly payment for the loan is $780, of which $240 relates to interestpayment and the remainder relates to principal repayment.One month's credit is received from inventory suppliers and Levi will utilise thispayment 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 levelthat 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 themonth 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:(a) Prepare a cash budget for the six months ended 31 December 2021. (Can have a month ineach column. Start with the opening balance, then cash receipts, cash payments, net cashflow and closing balance).(b) Prepare an income statement for the six months ended 31 December 2021. Assume a 30%tax rate.

Answered: Levi Ackerman decided to resign from…

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:
(a) 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).
(b) Prepare an income statement for the six months ended 31 December 2021. Assume a 30%
tax rate.

Expert Solution

Step 1

A Cash Budget depicts the cash receipts and cash payments for the period. It helps the company to project its cash position as on particular date. Cash collections are inflows that are monies collected from customers and other incomes earned and cash payments are outflows that are monies paid to suppliers and other expenses incurred.

As the % of cash sales and credit sales is not given, all sales are considered as Credit sales. The ending inventory balance are considered to be at 100% of next month production requirement.

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Section 179 Deduction and Modified Accelerated Cost Recovery System (MACRS) Depreciation

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