Question 1

Majid and Nazir agree to form Ngao Limited company to acquire an existing small
industrial business. They are to contribute Rs.3,500,000 each for ordinary shares issued at
par. NDFC is to purchase from the company 10% debentures of Rs.4,000,000 required to
finance the business during the first six months without recourse to a bank overdraft.
These debentures are to be secured on the fixed assets of the company. Interest is payable
after every six months.
The company is to acquire freehold premises for Rs.3,000,000 plant and motor van
Rs.1,600,000 and inventory for an additional Rs.1,800,000.Settlement is to be made in
January 2014, the month of incorporation.
The following estimates are made of transactions for the six months commencing Ist
January, 2014:

SALES: January – Rs.2,800,000: February – Rs.3,200,000, March –

Rs.3,500,000 and Rs.4,000,000 for each of the following three
months. Gross profit on the cost to be at the rate of 25%.
PURCHASE: To be sufficient to secure inventory at the end of each month
adequate to supply the sales of the following month.
DEBTORS: To settle their accounts in full by the end of the second month.
CREDITORS: To be paid at the end of the month following the month of
purchase.
EXPENSES: (a) Wages and Salaries – Rs.180,000 payable on the last
day of each month for the first three months and
Rs.200,000 thereafter.
(b) General and administration expenses, Rs.140,000 per
month, payable at the end of each month.
(c) Rent and rates – Rs.80,000 p.a. payable six months on
31 March and 30 September.
(d) Preliminary expenses – Rs.150,000 to be paid in
February.
(e) Depreciation for six months – Rs.160,000
(f) Shares and debentures are issued on 1 January 2014.
REQUIRED:
1. Prepare a cash monthly cash budget from January to June 2014.
2. Projected Profit and Loss Statement for six months ending on 30th June 2014
3. Projected Balance Sheet as at 30th June 2014.
4. Projected Cash Flow Statement six months ending on 30th June 2014
Question 2
Osmond Limited is a small company to be formed by Connie and Winnie Bond to sell an
exclusive range of furnishings from a boutique in a fashionable suburb of London. In
January 2019 they plan to invest Rs.100,000 cash to purchase 50,000 Rs.1 shares each in
the company. Of this Rs.60,000 is to be invested in new fittings in January. These fittings
are to be depreciated over 3 years on the straight-line basis (their scrap value is assumed
to be zero at the end of their lives). A half-year’s depreciation is to be charged in the first
six months. The sales and purchases forecast for the company are as follows:

Jan Feb Mar Apr May June Total

(Rs.000)
Sales 20.4 61.2 61.2 81.6 81.6 102.0 408.0
Purchases 40.0 60.0 50.0 50.0 60.0 60.0 320.0
Other Costs* 18.0 18.0 18.0 18.0 18.0 18.0 108.0

*These include wages but exclude depreciation

The sales will all be made by credit card. The credit card company will take one month to
pay and will deduct its fee of 2% of gross sales before paying amounts due to Osmond
Limited. One month’s credit is allowed by suppliers. Other costs shown above do not
include rent and rates of Rs.20,000 per quarter, payable on 1 st January and 1st April. All
other costs will be paid in cash. Closing stock at the end of June is expected to be
Rs.116,000.

You may Ignore Taxes.

Required:
a) Prepare cash forecast for each of the six months to 30th June 2019.
b) Prepare a forecast profit and loss account for the same period.
c) Prepare a forecast balance sheet at 30 June 2019.
d) Comment briefly on the financial prospects of Osmond. You should refer both to its
profitability and liquidity.
QUESTION 3

Consider the balance sheet of RM Company at Dec.31 st 2021. The Company has
received a large order and go to bank for borrowing. As a result, it has to forecast
its cash requirements for January, February and March. The company collects 20%
of its sales in the month of sales, 70% in subsequent month and 10% in the second
month after the sales. All sales are on credit.

Assets RS.(000) Equity + Liabilities RS.(000)

Net Fixed Assets 1,836 Common Stock 100
Current Assets Retained Earnings 1,439
Cash 50 Long Term Debt 450
Accounts Receivables 530 Current Liabilities
Inventories 545 Accounts Payable 360
Bankl Loan 400
Accruals 212
Total Assets 2,961 Total Equity & Liabilities 2,961

Purchases of raw materials to produce malt are made in the month prior to the
sales and amount to 60% of sales in the subsequent month.
Payment for these purchases occurs in the month after the purchase. Labour cost
including overtime are expected to be Rs.150,000 in January, Rs.200,000 in
February and Rs.160,000 in March. Selling and Administrative expenses are
expected to be Rs.100,000 per month. Sales from November to April are given
below.

Months Rs.(000)
November 500
December 600
January 600
February 1000
March 650
April 750

Required:
a. Prepare a Cash Budget for the month of January, February and March 2022.
b. Determine the amount of additional Bank Borrowing necessary to maintain a cash
balance of Rs.50,000 at all times. The Company always maintains a safety stock.
c. Prepare a Performa balance sheet for March 31 2022.
Question 4

CF Ltd. is about to commence trading as a wholesaler of hats. CF Ltd’s only

shareholders, Mr. and Mrs. Topper, worked as employees of a hat retailer for many years,
but have recently been made redundant. They intend to subscribe Rs. 200,000 as the
initial capital.
Sales in 2020 are expected to be as follows:
Units
January 2,400
February 3,600
March 4,800
Thereafter 9,600 each month

The average selling price of each hat is to be Rs.10. All sales will be made on
credit terms, requiring settlement two months after the date of sale. However, if
settlement is made by customers within one month, a 2.5% cash discount will be given.
Of total sales, 60% are expected to be settled two months after the date of sale and 40%
(before any discount is deducted) are expected to be settled one month after the date of
sale.
The average purchase price for each hat will be Rs.7. CF Ltd. intends to make
purchases at the end of each month in order to maintain stocks at a sufficient level to
cover the following month’s sale. Initially, therefore, purchases of 2,400 hats will be
made in December 2019. Payment for purchases will be made on month on arrears.
Fixed assets are expected to cost Rs.250,000, payable in January 2020.
Depreciation on these assets will be Rs.5,000 each month, commencing January 2020.
These fixed assets are likely to have a low net realizable value.
Annual rent is expected to be Rs.24,000 and will be payable quarterly in
advance, commencing January 2020.
Monthly wages are expected to be Rs.4,000 and are payable in the month they
are incurred. Other overheads are expected to be Rs.6,000 each month, half of which are
payable in the month they are incurred and half are payable one month later.

Mr. and Mrs. Topper are considering approaching the bank for an overdraft or
loan finance, or a mixture of both. They are also unsure of the conditions that might
attach to any finance that the bank may offer.

Required: Prepare a monthly Cash Budget for CF Ltd. for the period of January 2020 to
May 2020 inclusive. It should show the expected net cash flow for each month and the
cumulative budgeted cash surplus or deficit at the end of each month. Assume for the
purpose of this cash budget that the bank has not provided any loan finance. Ignore
interest charges and taxation payments.
QUESTION 5. Loony Records Ltd owns a chain of record shops. At the beginning of
March 1999 the company had an overdraft of Rs.70,000 and the bank has asked for this
to be eliminated by the end of August 1999. As a result, the directors of the company
have recently decided to review their plans for the next six months in order to comply
with this requirement. The following forecast information had been prepared for the
business some months earlier:
Feb March April May June July Aug
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Predicted sales 360 400 600 540 300 260 340
Purchases 260 360 260 180 150 130 120
Administration 105 115 115 105 100 95 90
expenses
Selling expenses 40 40 50 60 50 40 40
Taxation due 50
Finance payments 10 10 10 10 10 10 10
Shop refurbishment 20 30 20
Notes:
i) Stock held at March 1999 was Rs.220,000. The company believes it is necessary
to maintain a minimum stock level of Rs.60,000 over the period to 31 August,
1999.
ii) Suppliers allow one month’s credit. The purchases of March, April and May are
subject to a contractual agreement which must be honored.
iii) The gross profit margin is 40%.
iv) All sales income is received in the month of sale. However, 40% of customers
pay with a credit card. The charge made by the credit card company to Loony
Records Ltd is 2% of the sales value when they pay the amount due at the end of
each month. These charges are in addition to the selling expenses identified
above.
v) The company has a bank loan which it is paying off in monthly installments of
Rs.10, 000 per month. The interest element represents 20% of each installment.
(Ignore interest on overdraft).
vi) Administration expenses are paid when incurred. This item includes a charge of
Rs.25,000 each month in respect of depreciation.
vii) Selling expenses are payable in the following month.
Required:
a) Compute the stock levels at the end of each month for the six months to
August 1999.
b) Prepare a cash flow forecast for each of the six months ended 31 August
1999 which shows the cash balance at the end of each month.
 c) Prepare a summary profit and loss account for the six months ended 31
August 1999
d) What problems for Loony Records Ltd are highlighted by the above
information for the next six months and how might the company deal with
them?
QUESTION 6
Rocker has recently returned home after spending some time overseas working for a
multinational company. While abroad, he made regular remittances to his bank. The
balance on his account stands at Rs.20,000 and he intends to use this sum to start a
business. In the course of his travels, he was very impressed by the quality and price of
bamboo furniture obtainable in the far East, and he reached the conclusion that these
items would find a ready market in the PK. He has found a reliable supplier and plans to
start trading on 1st July 1995. Rocker provides you with the following information:

(i) He has made arrangements to lease lock-up premises where the furniture
will be deposited until it is sold. The ten-year lease involves a total outlay
of Rs. 15,000, which will be paid in full at the end of June 1995. In the same
month, Rocker expects to acquire a van costing Rs. 3,000 in which to
transport the furniture the van will last four years and then be valueless.
(ii) He will take delivery of the first consignment of stock on 1 st July 1995 at a
cost of Rs, 6,000 each, further consignments of furniture costing Rs.4500
each will be received at two-monthly intervals commencing August 1995.
Payment for the purchase of stock will be made in the month following
delivery.
(iii) Rocker will advertise his furniture in trade catalogs and this will cost him
Rs. 150 per month commencing July 1995.
(iv) Sales will be made at cost plus a markup of 100%. He estimated that sales
will take place as follows:
July 1995: Zero
August-September 1995:Rs.2, 000 per month
October 1995 onwards: Rs.5000 per month
Payments will be received in the month following sales.
(V) Rate will amount to Rs.600 per year, payable in half-yearly installments on
1st April and 1st October. However, an initial payment of Rs 150 will be
made on 1st July, for the three months, July-September 1995.
(VI) Rocker operating expenses of Rs. 200 will be paid each month, commencing
July. Rocker will make monthly drawings of Rs.700 also commencing July.
Required:
(a) A cash budget for the twelve months to 30 June 1996 showing the cash
surplus or deficit at the end of each month.
(b) An estimated profit statement for the year to 30 June 1996.
(c) A numerical reconciliation of the forecast change in the cash position,
between 1st July 1995 and 30th June 1996, and the estimated profits for that
period.
(d) An assessment of Rocker’s proposals.