ACC5502 - Assignment 2 - 2013

Assignment Two – ACC5502 Accounting and Financial Management

Due date: 22 May, 2013. Total Marks: 100 Weighting: 20%

In your capacity as consultant, your firm has been called upon to provide management consulting services to ABC Ltd, which is a toy manufacturing company. The company has just made its first loss since formation, but has been suffering cash flow problems for a number of years. Management has recently reviewed its manufacturing process and introduced a number of cost saving measures. The managing director is still concerned however and requires a projection of cashflows before she is willing to sign the accounts for the previous accounting period.

The bank has indicated that it is willing to extend the firms current overdraft limit from $75,000 to $100,000. The bank overdraft interest rate is 3% above that of the bank bill swap rate, and the bank is willing to make bank guaranteed commercial bills available to ABC Ltd, in return for a first mortgage over its buildings.

Prepare an initial cash flow projection based on the following:

1. Sales are expected to increase by 14% over the 2012 figure of $1,785,000. Ninety percent of sales are on 30 days credit with payment expected in full (except for bad debts – see below) in the calendar month following sales. Budgeted sales are expected as follows

Jan 12% July 5%

Feb 10% Aug 12%

Mar 7% Sept 5%

April 10% Oct 5%

May 7% Nov 12%

June 10% Dec 5%

1. As at 31/12/12 the balance of accounts receivable was $83,412 and the balance of accounts payable was $68,124.
2. Total expenses for the year are expected to be $775,000 before interest. Depreciation for the year is expected to be $75,000 for the company’s fixed assets. Expenses are incurred evenly throughout the year and are paid in the month of incurrence.
3. Purchases of inventory are made in each month and are based on the total sales needs of the following month. Cost of goods sold are approximately 60% of sales. The purchases are paid for in the month following purchase.
4. Overdraft interest is charged on a monthly basis on the opening balance, which was $72,342 on the 31/12/12.
5. The bank bill swap rate as at the 31/12/12 was 4.25%.
6. Bad debts are predicted to be 1% of total credit sales.

The managing director of ABC Ltd requires

1. An initial cashflow projection and income projection based on the above, plus two further sets of projections which make allowance for sales fluctuations of 2% on the projected increase of 14% predicted, for the calendar year 2013. (Completed on a spreadsheet programme.)
2. An executive report which outlines your commentary on the predicted scenarios and any recommendations.

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TITLE PAGE

Subject        :         ACC5502 Accounting and Financial Management Assignment Two  

Student Name    :        Lau Ying Jin (Tess) 

Student Number     :         001014451

Semester: S1-2013

Date of Submission:    22 May 2013

Topic:

1. Executive Summary 
2. Cash Flow and Income Projection 

PART 1:  EXECUTIVE SUMMARY

This cash flow and income projection is prepared for Managing Director Mr. Chana Khaw of ABC Ltd.

This report has been represents the cash flow and income projection for ABC Ltd, budget according to the last year 2012 sales and expense as the bases of projection for year 2013 and maybe following by 2014. 

The purpose of the report is to define the current problem on cash flow of the company, and predict and control for 2013 for the objective of getting a better budget, reduces the suffers from cash flow problems in order to achieve company effectiveness in next calendar year. 

The pros of the ABC Ltd is their high credibility with banks, they was able to support the company by increasing their overdraft limits by 35%, I assume that the payment of ABC Ltd is healthy, but however the budget cash was not used efficient enough therefore was at negative over more than eight months in 2012 it show unhealthy. 

The sales fluctuation based on 14%, 12% and 16%, I will recommend ABC Ltd should increase sales by getting more fixed customer to stable the monthly products, at same time may increase the product types for certain special events, to open more new market. Increase on marketing budget and decrease in some fix and non-fix expense. 

The key area of this report inclusive of the coverage on the ‘cash receipts’ on total sales minus collected cash was 10% and credit was 90% plus back debts 1%; and ‘purchasing budget’ each month of the year was calculated as the beginning inventory of next month = total of this month’s purchases. For ‘cash budgeting’ is available = beginning cash + receipts cash. And the ending balance is the Available cash plus total of disbursements. The detail of the workout has been provided in this report.     

ABC LTD
Data Input Area
Sales					Total Expenses		$775,000
2012		$1,785,000			Depreciation		$75,000
2013 increase		14%			Purchases:
Sales Pattern:					Cost of Goods Sold		60%
July, September, October, December			5%		Purchases Prior Mth		100%
March, May			7%		Inventory 31/12/12
April, June, February			10%
Janauary, August, November			12%		Accounts Receivable		$83,412
Sales Collections:					Interest Rate		7.25%
30 day credit		90%			Beg. Cash Balance		-$72,342
Cash Sales		10%
Schedules/Calculations Area
							Cash Receipts
			January	February	March	April	May	June	July	August	September	October	November	December	Total
Anticipated Sales			$244,188	$203,490	$142,443	$203,490	$142,443	$203,490	$101,745	$244,188	$101,745	$101,745	$244,188	$101,745	$2,034,900
Cash Collect.: 10%			24,419	20,349	14,244	20,349	14,244	20,349	10,175	24,419	10,175	10,175	24,419	10,175	203,490
Credit Collect.: 90%			83,412	219,769	183,141	128,199	183,141	128,199	183,141	91,571	219,769	91,571	91,571	219,769	1,823,252
Bad Debts.: 1%			834.1	2,197.7	1,831.4	1,282.0	1,831.4	1,282.0	1,831.4	9.2	2,197.7	9.2	9.2	2,197.7	18,232.5
Total			$106,997	$237,921	$195,554	$147,266	$195,554	$147,266	$191,484	$115,980	$227,746	$101,736	$115,980	$227,746	$2,008,509
							Purchases Budget
		31/12/2012	January	February	March	April	May	June	July	August	September	October	November	December	Total
Needed for Sales		53,550	146,513	122,094	85,466	122,094	85,466	122,094	61,047	146,513	61,047	61,047	146,513	61,047	1,220,940
Ending Inventory		68,124	122,094	85,466	122,094	85,466	122,094	61,047	146,513	61,047	61,047	146,513	61,047	0	0
Beginning Inventory		53,550	68,124	122,094	85,466	122,094	85,466	122,094	61,047	146,513	61,047	61,047	146,513	61,047	68,124
Purchases		$68,124	$200,483	$85,466	$122,094	$85,466	$122,094	$61,047	$146,513	$61,047	$61,047	$146,513	$61,047	$0	$1,152,816
Report Area
							Cash Budget for ABC LTD
			January	February	March	April	May	June	July	August	September	October	November	December	Total
Beginning Balance			-72,342	-92,240	-113,693	-62,625	-96,165	-44,991	-78,424	-6,794	-95,702	12,086	-5,559	-94,458	-72,342
Receipts			106,997	237,921	195,554	147,266	195,554	147,266	191,484	115,980	227,746	101,736	115,980	227,746	2,008,509
Available			34,655	145,681	81,861	84,641	99,389	102,275	113,060	109,186	132,044	113,822	110,422	133,288	1,936,167
Disbursements
Expenses			58,333	58,333	58,333	58,333	58,333	58,333	58,333	58,333	58,333	58,333	58,333	58,333	700,000
Inventory			68,124	200,483	85,466	122,094	85,466	122,094	61,047	146,513	61,047	61,047	146,513	61,047	1,220,940
Interest			437	557	687	378	581	272	474	41	578	0	34	571	4,610
Total			126,894	259,373	144,486	180,806	144,380	180,699	119,854	204,887	119,959	119,380	204,880	119,951	1,925,550
Ending Balance			-$92,240	-$113,693	-$62,625	-$96,165	-$44,991	-$78,424	-$6,794	-$95,702	$12,086	-$5,559	-$94,458	$13,337	$13,337

LOR 

1. Investorword, definition of account payable, viewed 19 May 2013, <http://www.investorwords.com/51/accounts_payable.html#ixzz2TwlsgEp8>

1. Investopedia, definition of account payable, viewed 19 May, 2013,    

< http://www.investopedia.com/terms/a/accountspayable.asp>

1. Belverd E. N 2010,  ‘Financial and Managerial Accounting’, p. 373
2. David L. 1998, ‘Financial Decision-making: A CPA/Attorney’s Perspective’, Oasis Press. 
3. James C Van 2001, ‘Fundamentals of Financial Management, 11th edn. Prentice Hall.
4. Robert R. 2000, ‘Handbook of Budgeting’, 4th edn. AMACOM