Cash Budget worksheet

MAY 19 QUESTION 1

1 Marina plans to open a nail parlour, providing manicures to customers. You are the
accountant for Marina. The following forecast information relating to cash payments
of the business is shown below.
• Marina will invest £10 000 of her savings in cash.

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Marina will borrow £10 000 from a bank at an interest rate of 9% per year.
Repayment of the loan will be in 60 monthly instalments of £240, starting on the
last day of Month 1. Each £240 instalment will consist of £75 interest and £165
loan repayment.
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• The bank has agreed an overdraft limit of £2 000. Interest is to be charged on
overdrawn balances at the end of each month at a yearly rate of 12%, to be paid
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monthly on the first day of the following month.

• Premises, at a rental of £840 a month, require immediate alterations costing

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£7 375, which will be depreciated over 25 years.

• The premises will also be redecorated at a cost of £1 450

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20 years.
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Fixtures and fittings costing £4 700 will be purchased and depreciated over

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• Furniture costing £2 900 will be purchased and depreciated over 10 years.

• Equipment costing £1 600 will be purchased and depreciated over 5 years.

• Marina will sell nail accessories, e.g. polish and lotions, to customers. The initial

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inventory of nail accessories will be purchased for £1 200

• The electricity bill will be £125 a month, payable in advance on the first day of
each month as from Month 1.

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The gas bill will be £210 per quarter (three-month period), payable in arrears on
the last day of Month 3 and then every three months.

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• The water bill will be £570 for the year, payable in full on the first day of Month 1.

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The business will be open for customers from the start of Month 2. The following
forecast information is shown below.
The nail parlour will be open for nine hours a day, six days a week. There are four
weeks in a month.

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On average, each customer will be charged £25 for a manicure and spend £5 on
nail accessories.
There will be 12 customers per day.
The mark-up on nail accessories will be 100%.
Nail accessories sold will be replaced and paid for at the end of each week.

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 • One member of staff, Florentia, will be employed by Marina and she will serve
half of the customers. Florentia will be paid commission only, earning 35% of
the income from manicures she carries out, and 50% of the income from nail
accessories she sells. Florentia will sell half of all nail accessories.
• Florentia will be paid weekly.
• Starting in Month 2, Marina will take £400 per week as drawings from the

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business.
The bank has asked for certain documents to be prepared if it is to provide the loan

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and overdraft facilities. As Marina’s accountant you have to prepare these documents.
Required
(a) Prepare the cash budget, in columnar format, for each of the first three months

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of the business.
(22)
(b) Prepare the budgeted Statement of Profit or Loss and Other Comprehensive
Income for Marina’s nail parlour for the first year of business.

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(21)
(c) Evaluate the use of budgets for a new business.
(12)
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(Total for Question 1 = 55 marks)
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 JAN 13 QUESTION 4

2. Kim Seng plans to go into business opening a factory on 1 February 2013, to produce cartons of
soft drink. These will be sold and delivered to retail customers.

Kim Seng has £15 000 of his own money to put into the business. He also has a loan of £15 000
from his mother. The loan is to be repaid at a later date, not yet agreed.

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Additional information

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1. In the first week of February, Kim Seng plans to pay for the following:
 machinery £12 400
 a delivery vehicle £9 500

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 three months rent on the factory at £1 199 per month.

2. Production will start in Week 2 of February. The factory can produce 1 400 cartons per day.

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3. Kim Seng will purchase raw materials for the drinks, at the start of each week, at a cost of £0.04
per carton. All material purchases will be paid for in cash on the day of purchase.
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4. The water charge for the factory will be £640 per month, paid on the last day of every month.

5. Cartons will be delivered to retail customers on the day of production. Delivery costs are
expected to be £280 per week, payable at the end of each week.
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6. All output is sold on the day of production. Retail customers will pay Kim Seng £0.22 per
carton. All sales will be on credit. 70% of retail customers will pay one month after the sale.
The other 30% will pay two months after the sale.
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7. Kim Seng will take drawings of £400 per week, starting from 1 February 2013.

8. Assume that the factory will operate five days per week and four weeks per month.
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Required :

(a) Prepare a monthly Cash Budget for each of the three months February to April 2013.
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(24)

(b) Evaluate the level of drawings that Kim Seng is taking out of the business each month.
(8)
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(Total 32 marks)

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 JAN 14 QUESTION 4

3. Auto Albion Motors plc are developing a new car, the Zeus.

The following information is available:

The costs involved in the launch of the new car are expected to be:

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£ million
Research and development 80
Purchase of land for factory 31
Building new factory 42

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Machinery and equipment for new factory 28
Marketing 39

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Capital for the new car project is to be funded in the following ways:

• A share issue to ordinary shareholders for 40% of the capital required.

• £84 million in prior charge capital is to be raised, consisting of a 6% debenture and a bank loan.

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This is to be raised in the following ratio: two thirds 6% debenture : one third bank loan
• The remainder is to be sourced from retained profit.
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Required:

(a) Prepare a Capital Budget to finance the launch of the new Zeus car.
(6)
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Additional information:

All cars are built to meet sales orders.

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If a sales order cannot be met in the same week, the factory will produce the car in the next week,
or as soon as possible.

The capacity of the factory is 6 800 cars a week.

d

In the first four weeks sales of Zeus cars are expected to be:
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Week 1 8 000 Week 2 6 000 Week 3 5 500 Week 4 3 200

Required:
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(b) Prepare a Production Budget, in units of cars produced, for each week of the first four weeks
of production of Zeus cars.
(6)

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 Additional information:

The Zeus car will be sold to customers at a selling price of £11 750.

Customers are to be given three payment options to choose from:

• Option 1 – 60% of customers are expected to pay for their new car in cash in full on the day
of the sales order.
• Option 2 – Buy the new car on the terms “nothing to pay for 12 months”, with payment being

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made in full 12 months after the date of the sales order.
25% of customers are expected to select this option.
• Option 3 – Buy the new car on the terms “10% deposit, then 24 monthly payments of £450,
starting one month after the sales order.

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The remaining customers are expected to select this option.

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Required:

(c) Prepare a Cash Budget to show the amount received from customers for each of the first four
weeks of sales of Zeus cars.
(12)

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(d) Evaluate the three payment options from the point of view of Auto Albion Motors plc.
(8)
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(Total 32 marks)
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 MAY 15 QUESTION 4
4 George and Mary run a farm. The business is seasonal, and on 1 July 2015, they
expect to be overdrawn by £4 000. They have been asked to meet the bank manager
to discuss the overdraft. The bank manager has asked George and Mary to bring
a monthly cash budget for the 6 months 1 July 2015 to 31 December 2015 to the
meeting. George and Mary have asked you, their accountant, to draw up the monthly
cash budget.

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The following information is available:

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• The farm shop is only open in July and August and sells fruit for cash. Sales are
expected to be £80 per day, 7 days a week.
• Expenses of the farm shop are £10 per day.

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• The wheat is to be harvested in August and sold to a flour producer for £195
per ton. The harvest is estimated to be 45 tons. The flour producer will pay in
September.

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• In August and September, fruit will be sold to supermarkets for £2 500 for each
month. The supermarkets will pay two months after the sale.
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• Vegetables will be harvested and sold in September, October and November, for
£900 each month, to a factory. The factory will pay one month after the sale.
• In November and December, animals will be taken to the market and sold for
cash, for £130 per animal. Each month, 5 animals will be sold at the market.
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• In July, August and September, a farm worker will be employed and paid £175 per
week.
• Feed and fertiliser £235 per month
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• Power and fuel £175 per month

• Depreciation £150 per month
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• Other fixed costs £25 per week

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• Drawings for George and Mary will be £180 each per week.
• Assume 4 weeks in a month.
Required:
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(a) Prepare a monthly cash budget for the farm, for each month of the 6 month
period 1 July 2015 to 31 December 2015.
(24)

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 At the meeting, the bank manager recommends a 6 month bank loan for George and
Mary from 1 July 2015 for £6 000.
Required:
(b) Evaluate the Bank Manager’s recommendation.
(8)

(Total for Question 4 = 32 marks)

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 MAY 16 QUESTION 1
5 Chong and Mei are starting Lantau Insurance Agency Limited, which will sell insur-
ance policies.
The new company is to be funded with a capital of £90 000 in the following ways:
• Friends and family of Chong and Mei will buy shares in the company for 30% of
the capital required

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• 40% of the capital required will be raised as a bank loan
• The remainder of the capital will be invested equally by Chong and Mei. This is to

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be raised in the following ratio:
two thirds shares purchased : one third personal loan.
Required:

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(a) Prepare a Capital Budget for the start of the business.
(4)
The terms of the insurance policies sold mean the customer will pay a £30 premium

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on the date of the sale, then pay a monthly premium of £30 on the same date of
each and every following month for the remainder of the policy. All policies have
a minimum length of one year. The first three months of premiums collected are
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retained by Lantau Insurance Agency Limited as an introduction fee.
Chong and Mei are considering two options as business models on how to set up and
run the company. Initial costs to set up the business will be £30 000, regardless of the
option chosen. This is in addition to the costs shown below.
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The two options are:

Option 1:
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Operate the business from shop premises in the town centre.

Costs will be:
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• Payment for lease on shop premises £10 000

• Purchase of furniture for shop £4 000
• Purchase of computers for shop £2 500
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• Rent of shop premises £500 per month

• All other expenses total £1 800 per month.
Staff will receive basic pay, but will not be paid commission. Basic pay will be at a rate
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of £1 000 per month per employee. Six staff will be employed and each staff member
will sell eight insurance policies per month.

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 Option 2:
Operate the business from an office on the edge of town.
Costs will be:
• Purchase of furniture for office £3 000
• Purchase of computers for office £2 000
• Rent of office premises £400 per month
• All other expenses total £1 600 per month.

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Staff will receive basic pay and will also be paid a commission. Basic pay will be at a
rate of £500 per month per employee. Staff will find and visit potential customers to

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sell insurance policies. Commission will be paid to staff at a rate of 25% of premiums
paid by customers each month, for the first six months of the policy. Eight sales staff
will be employed and each staff member will sell 12 insurance policies per month.

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Required:
(b) Prepare a monthly Cash Budget for Lantau Insurance Agency Limited for each of
the first three months of trading for

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(i) Option 1
(17)
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(ii) Option 2.
(19)
(c) Evaluate the two possible options on behalf of Lantau Insurance Agency Limited.
(12)
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(Total for Question 1 = 52 marks)

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