Case Study 1

Financial Statements

You have been presented with the task of preparing a budgeted income
statement and balance sheet for the period to 31 December 2013. The
second part of this assignment is to prepare the cash flow forecast – this will
be done in conjunction with the balance sheet.

You need to assume the there are no take-on balances and in order to keep
the calculations down to a minimum, the company will not hold any inventory.

The following information relates to the company’s budget based on

discussion with staff members.

1. Units expected to sell, average selling price and average cost of goods
sold – obtained from marketing and advertising department – 50% of
monthly sales is collected in the month of the sale and 50% in the
following month/payment for stock sold is made in the following month of
the sale / no inventory is maintained, as it is assumed that the stock can is
bought and sold in the same month :

Month Units Average Average

SP COGS
January 12 $150,000 $122,000
February 9 $150,000 $122,000
March 15 $150,000 $120,000
April 14 $154,000 $120,000
May 23 $154,000 $120,000
June 25 $154,000 $118,000
July 10 $154,000 $118,000
August 9 $156,000 $118,000
September 25 $156,000 $118,000
October 26 $156,000 $118,000
November 21 $156,000 $118,000
December 5 $145,000 $118,000
As a benchmark it may be useful to know that the
average gross profit margin for the year is 23%

© 2013 DC Gardner
2. Salaries are made up as follows, with a 5% pension contribution from the
company only – paid monthly:

Managin CFO Marketing Sales Admin. Other

g Head Staff Team
Director
Number 1 1 1 4 3 2
Average
Salary – $495,000 $390,000 $323,000 $235,000 $201,000 $155,000
yearly
Total - $495,000 $390,000 $323,000 $940,000 $603,000 $310,000
yearly
Average
Total - $41,250 $32,500 $26,917 $78,333 $50,250 $25,833
monthly

3. Rental cost for the premises, for the year is set at $750,000. This includes
all property costs, namely, electricity, taxes; refuse removal, water and any
other related repairs – paid monthly.
4. Travelling costs amount to 2% of monthly sales – paid in the following
month. (not income -cash forecast)
5. Marketing costs amount to 3% of monthly sales – paid in the following
month.
6. Bank charges amounts to 0, 1% of monthly sales – paid in the month
incurred.
7. Fixed assets are made up as follows and funded partly by a long-term
loan amounting to $1,000,000 and the balance with equity:

Units Cost per Total Depreciation Depreciation

Unit Method Rate
Computer 11 $22,319 $245,509 Straight line 33%
Equipment
Furniture 14 $18,673 $261,422 Straight line 15%
& Fittings
Motor 7 $115,000 $805,000 Straight line 20%
Vehicles

8. The long-term loan to fund the business and the fixed assets will amount
to $1,000,000. The period of the loan will be for 5 years, at 13.50% fixed
interest rate over the term of the loan with monthly repayments amounting
to $23,010, being paid monthly – you will need to prepare a monthly
amortisation table. (LONG-TERM DEPT)
9. Training costs amount to $250,000 per annum and will be spread evenly
over the year – payments to be made on a monthly basis.
10. Fees – sundry amount to $100,000 per annum and will be spread evenly
over the year – payments to be made on a monthly basis.
11. Office supplies amount to $75,000 per annum and will be spread evenly
over the year – payments to be made on a monthly basis.

© 2013 DC Gardner
12. Technology amounts to $155,000 per annum and will be spread evenly
over the year – payment to be made at the beginning of January 2008.
13. Telephone amounts to $185,000 per annum and will be spread evenly
over the year – payments to be made on a monthly basis.
14. Sundry Costs amount to $90,000 per annum and will be spread evenly
over the year – payments to be made on a monthly basis.
15. Taxation rate is 29% with accrual for tax made at the end of the year only
and 50% paid in December 2013.
16. Initial share capital amounts to $311,911.
17. No dividends will be paid during the forecast year.
18. Calculate any ratios you may consider useful in order to check the validity
of your budgets and forecasts.
19. This case study will be the basis of the case study on variance analysis.

The case study has four parts:

A. Income statement
B. Cash flow statement
C. Balance sheet
D. Ratio analysis

© 2013 DC Gardner