Naaz started up a business, and pays £80,000 into her business bank account on 1st July and budgets as follows: Fittings to be purchased on 1st July for £90,000, and this will have to be paid for by the end of the month. Depreciation is £10,000 a year.

Wages: £10,000 per month.

Rent of warehouse will be £84,000 per annum, payable in monthly instalments at the start of each month.

Other costs incurred in the running of the business (excluding purchases) will be £40,000 per month, payable in the month in which the costs are incurred.

Purchases will be supplied on one month’s credit (i. e. purchases in July will
have to be paid for by the end of August).

Half of the sales are expected to be for cash; the remaining half on credit. Naaz is budgeting to allow two months’ credit by her credit customers (i. e. credit sales in July will not be settled until September).

For the purposes of the Profit & Loss and Balance Sheet closing stock is valued at £90,000. There is no opening inventory (stock) figure for the ‘Cost of Sales’ calculation.

Naaz had drawn £500 a month.

After careful market research, Naaz expects a steady but rapid expansion in her business. Her forecast for sales and purchases is as follows:

Sales Purchases
£ £
July: 90,000 40,000
August: 130,000 50,000
September: 170,000 70,000
October 260,000 90,000
November 250,000 95,000
December 300,000 120,000

Required:

a. Prepare a monthly Cash Flow Statement for Naaz for six months forecast from July to December.

b. Prepare a budgeted trading and Profit and Loss Account for the six months to the end of December
c. Prepare the Balance Sheet for the same period.

d. From the results of your cash flow comment on the viability of Naaz’s proposed business. You should provide some recommendations within your discussion.

e. Analyse the Income Statement (Profit and Loss Account) and Statement of Financial Position (Balance Sheet) with reference to the Net Profit Margin and Current Ratio.