How to solve free accounting problems
Coach Inc. in China is growing at a rapid rate and its strategy team are actively focusing on this growth area for the company. In anticipation of future growth, the directors of the company have built up their finished goods stocks at an even faster rate to make sure that they can meet customer demand.
The Sales Director has reported on the two months of actual sales for July 2013 and August 2013 and has also estimated sales for the next six months:
$
July 22,500,000
August 27,000,000
September 29,000,000
October 30,500,000
November 32,500,000
December 35,000,000
January 36,500,000
February 38,000,000
In August 2013, accounts receivable were 60 days sales. The credit controller has targeted debtor days to reduce from 60 days at 31 August 2013 to 45 days at 30 September 2013 and 30 days on 31 October 2013. He has also targeted 30 days to be maintained thereafter.
The plant manager has provided a production plan to give required level of production as follows:
• September 2013 to February 2014 raw material purchases to be $8,600,000 per month.
• July 2013 and August 2013 were $10,000,000 and $9,000,000 respectively.
• Materials are bought with supplier payment terms of net 45 days.
• Salaries and wages are $2,900,000 per month and paid in each month
• Overheads and utilities are $5,600,000 per month and paid in each month.
The commercial manager has estimated that selling and administrative cost to be as follows:
• September and October 15% of sales
• November and December 14% of sales
• January and February 13% of sales
All these expenses will be paid in the month that they are incurred.
The balance sheet of Coach Inc. in China as at 31 August 2013 was as follows:
Assessment Criteria:
1 Prepare a forecast profit & loss account for the two months of September and October and a forecast balance sheet as at 31 October 2006. 30%
2 Prepare a Cash budget for September to February to determine the cash flows that would result from his action plan. 35%
3 Prepare a Cash Budget for September to February if the credit controller does not meet his target and debtors remain at 60 days of sales 20%
4 Draft a report for the Managing Director that makes use of the analyses that you have carried out to consider arguments both for and against customer terms of 30 days or 60 days. Your report should also consider some of the wider financial and non-financial factors in addition to the cash flow impact of both scenarios. 15%
$’000 $’000 $’000
Fixed Assets 164,800
Fixed assets at cost 69,800
Depreciation 95,000
Current Assets
Stocks – Raw materials 38,400
Stock – Finished goods 85,200 123,600
Accounts Receivable 52,500
Other assets 25,600
Bank and cash 10,500
212,200
Current liabilities
Accounts payable 14,000
Short – term loans 15,000
Accruals 14,800
Corporation tax payable 5,000
48,800
Net current assets 163,400
Total assets less current liabilities 258,400
Long term loans 130,600
Net assets 127,800
Capital and reserves
Share capital 90,000
Profit and loss account 37,800
127,800
Interest payable on long and short – term loans is accrued at 10% per annum.
Short – term loan repayments to be made are $2,500,000 at the end of October 2013 and $2,500,000 at the end of January 2014. Half year interest of $8,000,000 is payable in January 2014.
Depreciation (a manufacturing cost) runs at $700,000 a month and cost of sales is 70% of sales.
Materials used during September 2013 and October 2013 are expected to be $11,000,000 for each month. Corporation tax on profits can be calculated at 50%. Corporation tax of $5,000,000 is expected to be paid in December.
Assessment Criteria:
1. Prepare a forecast profit and loss account for the two months of September and October and a forecast balance sheet as at 31 October 2013. 30%
2. Prepare a cash budget for the managing director for September 2013 to February 2014 to determine the phasing of the cash flows that would result from his action plan. 35%
3. Prepare for the managing director, the forecasted cash flows and month-end cash balances for September 2013 to February 2014 if the credit controller does not meet his target and debtors remain at 60 days of sales, as compared with the results following successful implementation of the action plan. 20%
4. Draft a report for the managing director that makes use of the analyses that you have carried out to consider arguments both for and against customer terms of 30 days or 60 days. Your report should also consider some of the wider financial and non-financial factors in addition to the cash flow impact of both scenarios. 15%
