Q 1) Monthly Cash Budget for 5 month period.

The estimated cash inflows and outflows for the media company for the specific period of time are given

as under:

Monthly Cash Budget

Apr-11 May-11 Jun-11 Jul-11 Aug-11
Photography 1,000 1,000 1,000 1,000 1,000
shop 100% cash 4,500 6,000 10,500 8,000 9,000
Internet 15% cash 7,500 13,500 16,500 18,000 12,750
Internet 85% Installment 7,004 7,004
7,004 7,004 7,004
7,004 7,004 7,004 7,004
8,755 8,755 8,755 8,755 8,755
15,759 15,759 15,759 15,759
19,261 19,261 19,261
21,012 21,012
14,884

Total Revenue Cash Inflow 42,767 66,026 85,783 98,791 102,421

Purchases -Film & Media 36,102 42,660 63,480 74,100 68,640

Photography - Overhead Cost 250 250 250 250 250
Wages 7,500 7,500 7,500 7,500 7,500
Website cost 1,863 2,951 3,714 4,490 4,621
Rent 6,000 6,000 6,000 6,000 6,000
Insurance - - - - -
Misc Expense 2,138 3,301 4,289 4,940 5,121
Total Manufacturing & Operating Cash Outflows 53,854 62,663 85,233 97,279 92,132
Interest Paid/Received 83 67 30 41 43
Opening Cash 20,000 8,996 12,426 13,006 14,559
Closing Cash 8,996 12,426 13,006 14,559 24,891

Monthly cash budgets show that the available cash reserves for all the months can meet the unexpected

needs or take benefit of the business opportunities as they arise. The analysis shows that the financial

health of the firm is strong and can sustain the variable market demand.
Q 2) Monthly Projected Income Statements

The monthly projected Income Statement for the given period of time is as under:

Monthly Projected Income Statement, for the month ending

Apr-11 May-11 Jun-11 Jul-11 Aug-11

Internet Sales 50,000 90,000 110,000 120,000 85,000

Shop Sales 4,500 6,000 10,500 8,000 9,000
Photography Revenue 1,000 1,000 1,000 1,000 1,000

Opening Stock - Media & Film 47,300 69,120 86,760 92,160 67,680
Purchases - Media & Film 32,700 57,600 72,300 76,800 56,400
Closing Stock - Media & Film 69,120 86,760 92,160 67,680 75,600
COGS - Media & Film 10,880 39,960 66,900 101,280 48,480
Gross Profit 44,620 57,040 54,600 27,720 46,520

Photography - Overhead Cost 250 250 250 250 250

Wages 7,500 7,500 7,500 7,500 7,500
Website cost 2,564 4,615 5,640 6,153 4,358
Rent 6,000 6,000 6,000 6,000 6,000
Insurance 218 218 218 218 218
Depreciation 1,876 1,838 1,802 1,766 1,730
Misc Expense 2,725 4,800 6,025 6,400 4,700
Operating Expenses 21,133 25,221 27,435 28,287 24,757
Operating Profit 23,487 31,819 27,165 (567) 21,763
Interest (expense)/profit 67 30 41 43 49
Net Profit 23,554 31,849 27,206 (523) 21,812

Income statement explains that business is profitable for the first three months, goes down in the 4 th

months and picks up in the 5th month. Gross Profit, resulting from comparatively less sales, has reduced

in the 4th month due to which the profitability has gone down for the specific month.
Q 3) Projected Balance Sheets for the period April to August 2011

Balance Sheet, as at
30-Apr-11 31-May-11 30-Jun-11 31-Jul-11 31-Aug-11
Fixed assets 125,000 125,000 125,000 125,000 125,000
Depreciation 33,076 34,914 36,716 38,482 40,212
Net book value 91,924 90,086 88,284 86,518 84,788

Stock 69,120 86,760 92,160 67,680 75,600

Debtors 60,808 94,077 132,599 165,868 160,615
Pre paid insurance 1,744 1,526 1,308 1,090 872
Cash - 34,434 - 35,821 -
Interest receivable 67 - 115 - 119
Total current assets 131,739 216,797 226,182 270,459 237,206

Creditors 25,158 40,098 48,918 51,618 39,378

Overdraft 31,004 - 34,194 - 25,874
Interest payable - 310 - 342 -
Total current liabilities 56,162 40,408 83,112 51,960 65,252

Net Assets 167,501 266,474 231,353 305,017 256,742

Share capital 100,000 100,000 100,000 100,000 100,000

Retained profit 104,939 136,448 163,727 162,819 184,702
Equity 204,939 236,448 263,727 262,819 284,702

Q 4) - (i) total net profit from April to August varies with changes in cost of goods sold

120,000

100,000

80,000

60,000
COGS - Media & Film
Net Profit
40,000

20,000

-
Apr-11 May-11 Jun-11 Jul-11 Aug-11
(20,000)
ii) Closing cash in August

Closing cash in August is 25,000 which indicate that the company can leverage any future opportunity

for investment.

Closing Cash
30,000

25,000

20,000
Closing Cash
15,000

10,000

5,000

-
Apr-11 May-11 Jun-11 Jul-11 Aug-11

b) Brief report to the finance director of Image Select Media explaining your findings.

Profitability as represented by NP margin and ROE is high in the first 3 months falling sharply to a loss in

fourth month but recovering thereafter. Low closing inventory in anticipation of low sales in August

resulted in high COGS in July, reducing the gross margin and finally resulting in a net loss.

Financial Ratio Analysis Apr-11 May-11 Jun-11 Jul-11 Aug-11

NP Margin 42.44% 32.83% 22.39% -0.41% 22.96%
ROE 11.49% 13.45% 10.31% -0.20% 7.65%
Current Ratio 5.59 4.86 4.89 4.83 6.65
Total Asset Turnover 0.24 0.34 0.37 0.38 0.27

Current ratio of the company is healthy representing that it can take care of its short term obligations as

the company has the closing cash.

Since the company does not have long term debt it has low financial leverage. Furthermore due to

relatively less fixed assets as compared to total assets, the company also has low operating leverage.

Brief Report:

The excel format development was started with the Income Statement format. Sales over the internet

for January, February and March 2011 were £40,000 each month. Outlet sales in March were £4000.

Internet, shop and photography sales were plotted in the income part of the statement.

In order to calculate the Gross profit, cost of goods sold (COGS) was calculated. This calculation was

done by adding the opening stock and purchases and subtracting closing stock. Purchases were

calculated by multiplying 0.6 by the value they are sold for before any supplement (ie cost of goods sold

= 60% of basic sales value). Closing stock at the end of each month is equal to 120% of the cost of media

forecast to be sold the following month

The operating expenses included Photography - Overhead Cost, Wages, Website, Rent, Insurance,

Depreciation and Misc Expense. Photography cost was calculated by taking 25% of the revenue received

from it. Web related cost was charged by taking the commission on 5% of sales. The firm that designed,

hosts and maintains Image Select Media’s website does not charge directly for these services but

instead charge a commission of 5% on all sales made via the internet (including on any supplement

charged for installment arrangements). The commission is regarded as an expense of the month the sale

takes place but the commission is paid in the month(s) Image Select Media receives the receipts from

those sales. i.e. commission is paid in the month of sale for sales paid in full and is paid on receipt of

each installment for installment sales. Depreciation of 2% (of opening net book value) is charged each

month on a reducing balance basis.

Difference of operating expenses and gross profit gave operating profit. Then Net Income was calculated

after adjusting interest amount.

Net Profit for the first three months was positive as the sales were good but fall in the fourth month due

to the huge amount of opening stock. Profit again showed positive value in the fifth month due to a

boost in sales.

Then Monthly cash budget was calculated by taking the difference of monthly cash inflows and outflows.

Cash inflows were calculated by adding cash flows from the following item sales:

 Photography

 Shop 100% cash

 Internet 15% cash

 Internet 85% Installment

Total cash outflows were calculated by adding the following cost items:

 Purchases -Film & Media

 Photography - Overhead Cost

 Wages

 Website cost

 Rent

 Insurance

 Misc Expense

The difference of the two was then adjusted with interest and opening cash to give closing cash amount.

Interest is earned monthly on positive cash balances at the rate of 4% per annum.
Interest is charged monthly on overdrafts at the rate of 12% per annum

In both cases interest is calculated on the closing cash balance before interest and is regarded as income

or expense of that month but is not received or paid until the following month.

The closing cash amount showed that the company has got enough cash to invest. This means that the

company can take other projects which can add to its bottom line.

Balance sheet was comparatively simple as it used data from income statement and cash flow details.

The difference of the current assets and liabilities gave net assets. Current assets included:

 Stock

 Debtors

 Pre paid insurance

 Cash

 Interest receivable

And the current liabilities included:

 Creditors

 Overdraft

 Interest payable