Question 2.SE.1: Choice Designs Ltd operates a wholesale/retail carpet store....
Choice Designs Ltd operates a wholesale/retail carpet store. The statement of financial position of the business as at 31 May Year 8 is as follows:
| Statement of financial position as at 31 May Year 8 | ||
| £000 | £000 | |
| ASSETS Non-current assets |
||
| Property | 600 | |
| Accumulated depreciation | (100) | 500 |
| Fixtures and fittings | 140 | |
| Accumulated depreciation | (80) | 60 |
| 560 | ||
| Current assets | ||
| Inventories | 240 | |
| Trade receivables | 220 | |
| Bank | 165 | |
| 625 | ||
| Total assets | 1,185 | |
| EQUITY AND LIABILITIES Equity |
||
| £1 ordinary shares | 500 | |
| Retained earnings | 251 | |
| 751 | ||
| Current liabilities | ||
| Trade payables | 268 | |
| Tax due | 166 | |
| 434 | ||
| Total equity and liabilities | 1,185 | |
As a result of falling profits the directors of the business would like to completely refurbish each store during June Year 8 at a total cost of £300,000. However, before making such a large capital expenditure commitment, they require projections of performance and position for the forthcoming year.
The following information is available concerning the year to 31 May Year 9:
■ The forecast sales for the year are £1,400,000 and the gross profit is expected to be 30 per cent of sales. Eighty per cent of all sales are on credit. At present the average credit period is six weeks, but it is likely that this will change to eight weeks in the forthcoming year.
■ At the year-end, inventories are expected to be 25 per cent higher than at the beginning of the year.
■ During the year, the directors intend to pay £40,000 for delivery vans.
■ Administration expenses for the year are expected to be £225,000 (including £12,000 for depreciation of property and £38,000 for depreciation of fixtures and fittings). Selling expenses are expected to be £85,000 (including £10,000 for depreciation of motor vans).
■ All purchases are on credit. It has been estimated that the average credit period taken will be 12 weeks during the forthcoming year.
■ Tax for the year is expected to be £34,000. Half of this will be paid during the year and the remaining half will be outstanding at the year-end.
■ Dividends proposed and paid for the year are expected to be 6.0p per share.
Required:
(a) Prepare a projected income statement for the year ending 31 May Year 9.
(b) Prepare a projected statement of financial position as at 31 May Year 9.
(c) Explain why an established business would find it easier than a new business to prepare accurate projected financial statements.
All workings should be made to the nearest £000.
Note: The cash balance will be the balancing figure.
Choice Designs Ltd
(a) The projected income statement is:
| Projected income statement for the year to 31 May Year 9 | |
| £000 | |
| Sales revenue | 1,400 |
| Cost of sales (70%) | (980) |
| Gross profit (30%) | 420 |
| Admin. expenses | (225) |
| Selling expenses | (85) |
| Profit before taxation | 110 |
| Tax | (34) |
| Profit for the year | 76 |
(b) The projected statement of financial position is:
| Projected statement of financial position as at 31 May Year 9 | ||
| £000 | £000 | |
| ASSETS Non-current assets |
||
| Property | 600 | |
| Depreciation | (112) | 488 |
| Fixtures and fittings | 140 | |
| Depreciation | (118) | 22 |
| Motor vehicles | 40 | |
| Depreciation | (10) | 30 |
| 540 | ||
| Current assets | ||
| Inventories (240 + (25% × 240)) | 300 | |
| Trade receivables (8/52 × (80% × 1,400)) | 172 | |
| Bank (balancing figure) | 42 | |
| 514 | ||
| Total assets | 1,054 | |
| EQUITY AND LIABILITIES Equity |
||
| Ordinary £1 shares | 500 | |
| Retained earnings | 297 | |
| 797 | ||
| Current liabilities | ||
| Trade payables (12/52 × 1,040*) | 240 | |
| Tax due (50% × 34) | 17 | |
| 257 | ||
| Total equity and liabilities | 1,054 | |
*Purchases = (Cost of sales + Closing inventories – Opening inventories) = (980 + 300 – 240) = 1,040
(c) An existing business may find it easier than a new business to prepare accurate projected financial statements for various reasons. These include:
■ past data concerning sales, overheads and so on for a number of years which may be used for comparison and extrapolation
■ close links with customers, suppliers and so on which will help to identify likely future changes within the industry and future price changes
■ a management team that is experienced in producing forecasts and that has an understanding of the impact of competition on the business.