Preparing Cash Budget & Income Statement Forecast For Braemer Shipping Ltd. – Procurement Unit

Activities to be Conducted

Question:

The following context is provided for the questions.

You have recently been appointed as a Manager for the Procurement Cost Unit at Braemer Shipping Ltd.  Your employment starts on January 1^st Year 0, and you find in place a 12-month budgeted Income Statement as presented below. Figures are expressed in GBP (000).

Braemer Shipping Ltd – Procurement Unit Budgeted Income Statement for the 12-month period Year 0

	Jan Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Feb	Mar	Apr	May	June	July	Aug	Sept	Oct	Nov	Dec	Total
Sales revenues	52	55	59	65	55	53	57	59	62	65	68	72	722
Cost of sales	(30)	(31)	(34)	(37)	(31)	(31)	(33)	(34)	(35)	(37)	(40)	(42)	(415)
Salaries & wages	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(10)	(120)
Electricity	(6)	(6)	(5)	(4)	(2)	(2)	(2)	(2)	(3)	(5)	(6)	(7)	(50)
Depreciation	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(2)	(24)
Other overheads	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(3)	(36)
Total expenses	(51)	(52)	(54)	(56)	(48)	(48)	(50)	(51)	(53)	(57)	(61)	(60)	(641)
Profit	1	3	5	9	7	5	7	8	9	8	7	12	81

The business policy on trade receivables and trade payables is 30 days credit. Hence customers who receive an invoice in January will only pay in February and likewise, invoices received from the business suppliers in January will be paid in February.

Prior to your arrival, the cash account has a credit of 70 from December of the previous year (Y -1) which is brought forward to January, giving you an opening cash balance of 70. Sales revenues in December Y-1 were 45 and costs of Sales 38.

Three months into the job you are invited to attend Senior Management meeting, to which you propose that some changes be made to the existing policies, and these are:

• Starting April, suppliers will be paid after 60 days;
• As from July, inventory levels will be reduced by 3 per month in July, August and September to align with the low trading season, and will increase again by 8 per month in October, November and December to maximise sales revenues generated by consumers spending spree;
• As from April, electricity costs will be paid quarterly;
• The equipment for warehouse handling must be disposed of in December and a new system put in place using a standard 6 year leasing agreement.

Senior Management has agreed to all your suggestions, and you can now implement them on schedule.

Activity 1 on cash budget

Prepare a cash budget for the 12-month period of Year 0 reflecting the effects of your new proposals.

Activity 2 on budgeted P/L account and cash budget   

Using the budgeted Income Statement for Year 0, prepare the Income Statement forecast (budgeted) for year Y+1. Assumptions are:

• Electricity costs will decrease by 1 each month
• Sales revenues will increase by 5 each month
• Leasing fees on new equipment is set at 3 per month and the bank has arranged for the supplier to install it on January 03 of Year (Y+1).

Prepare the cash budget for Y+1 on the basis of the assumptions listed above, AND including the changes you introduced in Year 0 cash budget.

Briefly discuss the effects of your initiatives on the profitability of the business.

Activity 3 on fixed asset

The equipment used in the warehouse was bought 3 years ago (Y-3) at acquisition cost of 150 with a five years life and a residual value of 30.  You can sell it on the market for 95 and buy a more energy efficient equipment. This sale will be realised on December 31, Y0, but the leasing agreement on the new equipment will be effective the following year (Y+1). You need to prepare the fixed asset statement for this equipment at the end of Year 0.

A budget is defined as a long term plan which helps the business to estimate the level of expenses and the level of profit that the Business will earn in the future years. The organizations generally formulate different monetary plans and policies and make the expenses and the profits accordingly to facilitate a new budget. The plan in the budget helps the company to make sales and demand forecast. According to Samkin (2010) the importance of budget is as follows:

• To help the management perform, review and control
• To ensure that the business is moving according to plan by comparing the actual results with the budgeted results
• To take appropriate actions when disparity is noticed between the actual plan and the budgeted expenses

The report here deals with the preparing of the cash budget of Global supply chain of Kawaski. The report shows the profit and loss statement as well as the cash budget statement for year Y+0 and the cash budget statement for the year Y+1.

Cash Budget	Year + 0
	Jan	Feb	Mar	April	May	June	July	August	September	October	November	December
Trade receivables	65	52	55	59	65	55	53	57	59	62	65	68
Trade payables	-35	-29	-31	0	-34	-36	-31	-29	-33	-34	-35	-36
Salaries	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10
Electricity	-2	-3	-4	0	0	-6	0	0	-5	0	0	-15
Overheads	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3
Total	-50	-45	-48	-13	-47	-55	-44	-42	-51	-47	-48	-64
Cash Surplus	15	7	7	46	18	0	9	15	8	15	17	4
Opening balance	50	65	72	79	125	143	143	152	167	175	190	207
Closing balance	65	72	79	125	143	143	152	167	175	190	207	211

Existing Policies

The cash budget for Y+0 shows the trade receivables same as the given income statement. Before January trade receivable of 65 was incurred and hence the same has been included at the beginning of Y+0 Budget sheet (Modell, 2010).  The same has been done in case of Trade payables. April is shown to be zero because from April the new policy of 60 days has been implemented. The electricity costs from April are made on quarterly basis and also reduced by 1 every month to cut the expenses as well as energy efficiency.

Budget Profit and loss for year Y+1
	Jan	Feb	Mar	Aprl	May	June	July	August	September	October	November	December
Sales revenue	55	58	62	68	58	56	60	62	65	68	71	75
Cost of sales	-29	-31	-34	-36	-31	-29	-33	-34	-35	-36	-37	-39
Salaries and wages	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10
Electricity	-3	-4	-5	-5	-2	-2	-2	-3	-3	-5	-6	-7
Other overheads	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3
Total expenses	-45	-48	-52	-54	-46	-44	-48	-50	-51	-54	-56	-59
Profit	10	10	10	14	12	12	12	12	14	14	15	16

Cash budget	Yr 1
	Jan	Feb	Mar	Arpl	May	June	July	August	Sept	Oct	Nov	Dec
Trade Receivables	71	55	58	62	68	58	56	60	62	65	68	71
Trade payables	-35	-36	-29	-31	-34	-36	-31	-29	-33	-34	-35	-36
Salaries	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10
Electricity	0	0	-9	0	0	-6	0	0	-5	0	0	-15
Overheads	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3	-3
Total expenses	-48	-49	-51	-44	-47	-55	-44	-42	-51	-47	-48	-64
Cash surplus	23	6	7	18	21	3	12	18	11	18	20	7
Opening balance	211	234	240	247	265	286	289	301	319	330	348	368
Closing balance	234	240	247	265	286	289	301	319	330	348	368	375

The year Y+1 budget have been prepared keeping in mind the changes in the previous budget. The opening balance has been derived from the closing balance of the Y+1 budget. This has helped the management to compare both the budgets so as to get a fair knowledge about the effectiveness of the policies (Horngren, 2013).

Weetman (2010) opined that a direct relation between the working capital management and the budget affects the cash position of the business. Hence if the policies are made to control the budget then the policies will have a direct effect on the working capital structure of the company. The main components of a budget are Trade receivables and the trade payables. Horngren (2013) suggested that working capital cycle is in a simpler sense known as the Trading cycle. Hence the change in the days of trade receivable and trades payable makes changes in the budget as well as the working capital cycle of the company.

For this reason to keep parity between the two the company can use two different policies namely the subjective approach and the objective approach. The other approaches that will help the company to prepare the budget are the determination of the Economic order quantity which will help the company to decide how much of a particular item should be ordered when the stocks reach replenishment level.

Moreover the control of the trade payables is also a major issue of managing the balance. The trade payables arise when the business buy goods on credit (Epstein and Lee, 2010). To make timely payment of the trade payables the company must have a positive trade receivable policy. Here the trade receivable policy is 30 days and the trade payable policy is 90 days. This is giving the business sufficient time to collect money from the debtors to be able to make payment to the creditors. However Atrill and McLaney (2013) opined that if the trade payable cycle is less than the trade receivable cycle then the business would have to pay cash from store and this will in turn reduce the liquidity of the business.

The 5 major T accounts that can be used for the calculation of the effect of fixed asst disposal as well as the effect of depreciation are namely fixed assets account, cash account, accumulated depreciation account, disposal of asset account and Profit and loss account (Blocher, 2013).

Step 1: Debit Fixed asset a/c by 250

Step 2: Depriciation of (250-50) / 5= 40 is credited to accumulated depreciation a/c each year and debited to P/L account.

Step 3: After three years the accumulated depreciation is 120

Step 4: The sale price is fixed at 110. At this point the accumulated depreciation is 120 making a net book value of (250-120) = 130

Step 5: The sale results is loss of 20.

Step 6: closing of the accounts

The fixed asset account will be closed by creating a disposal of fixed asset account and debiting the account by acquisition costs that is 250. The disposal account will further be credited by 110 of the sale price.

The accumulated depreciation account will be closed by debiting 120 and crediting the disposal of fixed asset account.

Step 7: Calculation of the net worth

Sale + accumulated depreciation- acquisition cost

= (110+ 120) – 250

= (20)

The amount is added to the loss of the year and will go to the shareholder’s funds to balance the net worth in the balance sheet.

P/L account for Y-2
	Jan	Feb	Mar	Aprl	May	June	July	August	September	October	Novemeber	December
Sales revenue	55	58	62	68	58	56	60	62	65	68	71	75
Cost of sales	-29	-31	-34	-36	-31	-29	-33	-34	-35	-36	-37	-39
Salaries and wages	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10	-10
Electricity	-3	-4	-5	-5	-2	-2	-2	-3	-3	-5	-6	-7
Leasing fee	-4	-4	-4	-4	-4	-4	-4	-4	-4	-4	-4	-4
Other overheads	-2	-2	-2	-2	-2	-2	-2	-2	-2	-2	-2	-2
Total expenses	-48	-51	-55	-57	-49	-47	-51	-53	-42	-57	-59	-62
Profit	7	7	7	11	9	9	9	9	23	11	12	13

The Report shows the cash budget preparation of both Y+0 and Y+1 years. Since the changes in the polices have been made in order to prepare a new budget for Y+1 hence the report tries to analyze the changes in the cash flow registered due to changes made in the budget as the policies. The trade cycle has been changed which shows a positive effect on the cash balance of the Y+1 year. The trade receivable time has been decreased to 30 days which means that the company will be able to realize the cash faster. On the contrary, the trade receivables policy of the company has been increased to 90 days which means that the company will have ample amount of time to utilize the cash received for the payment of the creditors

Finally the policy of reducing the electricity charges by 1 each month is a noble decision on the part of the management because it not only provides sustainable side to the company but also reduces the expenses thereby increasing the cash surplus.

Another decision of making the quarterly payment of the electricity expenses showed a rise of the cash surplus in the quarters where the company did not need to make any payments. However it can be seen that a quarterly payment may increase the burden of the company to make overall expense payment in one month.

Reference list

Atrill & McLaney, 8^th edition. 2013.Accounting & finance for Non-Specialists, pp.307-342.

Blocher, E. (2013). Cost management. New York, NY: McGraw-Hill/Irwin.

Epstein, M. and Lee, J. (2010). Advances in management accounting. Bingley: Emerald.

Horngren, C. (2013). Introduction to Management Accounting. Harlow: Pearson/Education.

Weetman, P. (2010) Management Accounting, Chapters 1 & 2.

Modell, S. (2010). Bridging the paradigm divide in management accounting research: The role of mixed methods approaches. Management Accounting Research, 21(2), pp.124-129.

Samkin, G. (2010). Qualitative research in accounting & management. [Bingley, UK]: Emerald.