I have financial accounting as one of the modules and I have got this particular exercise to solve. I would be hightly grateful if any one
For the past few years, Adam has been employed as a procurement agent in the building and designing department of a large DIY centre. He has mainly been responsible for the purchasing of wood, tiles and plants required by customers for using in their newly decorated homes, but in the busy season he has also helped in caring for the house plants in the greenhouses.
He now believes that he is ready to set up his own business, selling fitted wooden tiles. He proposes to commence trading in January 20X and has had a meeting with his bank manager to discuss his plans. The bank manager has requested that Adam produces a cash flow forecast covering the first twelve months of trading so that the cash requirements for that period can be identified. As Adam does not have any previous experience in dealing with financial information, he has approached your company for help. In the business plan to be presented to the bank manager, Adam wishes to include a cash flow forecast, the corresponding profit and loss account and balance sheet for the first twelve months of the business.
After contacting several suppliers, Adam estimates that the wooden tiles will cost him about £2 each for the first year, rising to £3.50 in his second year of trading. He intends to buy 1,000 tiles immediately. For accounting purposes, any tiles sold during a month will be considered to be replaced on the first day of the following month. He is currently unable to get any credit facility from his intended supplier, so he will have to pay for his wooden tiles as he replaces them.
Sand paper and varnish will be purchased from a company which supplies these items in batches costing £2,500 per batch. Each batch is sufficient for potting up to 5,000 tiles. The company will allow Peter two month's credit on his purchases from them. Each tile sold will require some sanding and varnishing before delivered to the customer.
In addition, each tile sold will also have to be sprayed with a fungicide, which will be purchased in batches. It is estimated that each batch of fungicide will cost £300, which will be sufficient to spray 1,000 tiles. This will be paid for in the month following that in which the purchase was made.
Adam has seen a small shop in town with a large backyard, which he believes would be ideal for his business. The shop premises are available for renting at a rate of £200 per month, payable in advance. He will also have to pay business rates on the premises which are expected to amount to £1,500 per year. This is payable in two equal installments on 1 April and 1 October. An assistant will be employed to help Adam in the business and will be paid at a rate of £5 per hour for a 40-hour week, for 52 weeks a year.
Electricity and heating costs are expected to amount to £1,800 per year. The bills will be received quarterly and are expected to be as follows: March £600; June £300; September £400; December £500. Adam intends to pay the bills in the month in which they are received. To ensure that potential customers know about the new business, Adam proposes to advertise in the local newspapers and on local radio. The cost of advertising is expected to amount to approximately £1,000 a year, payable in January. Adam has decided that he will require a motor vehicle for the business and has seen a second-hand van for sale at a local car dealer at a price of £3,000. The van would have to be paid for in full in February and it is expected to have a useful life of five years. A storage area is required to house the tiles before they are sold, and it is estimated that this will cost approximately £1,000, payable in January. The storage area is expected to last for ten years. Adam has no other sources of income and estimates that he will need to make drawings from the business of £400 per month for his private living expenses. Based on his previous experience whilst working at the DIY centre, he estimates that his wooden house tiles will sell for approximately £6.50 cash each for the first six months, rising to £7.00 for the remaining period. The sales pattern (in number of tiles) in his first year is expected to be:
Based on his previous experience whilst working at the DIY centre, he estimates that his wooden house tiles will sell for approximately £6.50 cash each for the first six months, rising to £7.00 for the remaining period. The sales pattern (in number of tiles) in his first year is expected to be: January 300 July 1,000 February 400 August 600 March 600 September 400 April 1,000 October 400 May 1,200 November 300 June 1,300 December 600
prepare a cash flow forecast for the first twelve months of the proposed new business, i.e. the year to 31 December 20X. 2. Produce the corresponding forecast profit and loss account and balance sheet for the business to 31 December 20X.