PALATIAL Ltd will commence trading in September 2021 with Share Capital of £45,000. It is forecasted in September 2021 that the company will spend £140,000 on equipment and will take out a loan of £125,000. Repayments of principal and interest are £3,650 per month. Sales are expected to be £60,000 per month for the first three months. All sales are for cash. Opening Inventory at the beginning of September is forecasted to be £30,000 and is paid in September. Inventory purchases are estimated to be 30% of sales each month. Suppliers are paid one month in arrears. Wages are forecast to be £20,000 per month, payable in the month they are incurred. Salaries will be £10,000 per month payable in the month they are incurred. Overheads are forecast to be £10,000 per month and paid one month in arrears. Rent is £28,000 per year payable annually in advance. Required: a) Produce a Cash budget for the period September to November 2021 which shows the cash balance at the end of each month. b) Discuss the cash flow problems will the company face over the next three months and how might the company deal with them? c) Discuss the differences between fixed and flexible budgets

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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PALATIAL Ltd will commence trading in September 2021 with Share Capital of £45,000. It is forecasted in September 2021 that the company will spend £140,000 on equipment and will take out a loan of £125,000. Repayments of principal and interest are £3,650 per month.

Sales are expected to be £60,000 per month for the first three months.

All sales are for cash.

Opening Inventory at the beginning of September is forecasted to be £30,000 and is paid in September. Inventory purchases are estimated to be 30% of sales each month. Suppliers are paid one month in arrears.

Wages are forecast to be £20,000 per month, payable in the month they are incurred. Salaries will be £10,000 per month payable in the month they are incurred. Overheads are forecast to be £10,000 per month and paid one month in arrears.

Rent is £28,000 per year payable annually in advance.

Required:

a) Produce a Cash budget for the period September to November 2021 which shows the cash balance at the end of each month.

b) Discuss the cash flow problems will the company face over the next three months and how might the company deal with them?

c) Discuss the differences between fixed and flexible budgets.

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