Question 5

James Records Ltd owns a chain of 14 shops selling compact discs. At the beginning of June the business had an overdraft of $35,000 and the bank had asked for this to be eliminated by the end of November. As a result, the directors have recently decided to review their plans for the next six months.

The following plans were prepared for the business some months earlier:

May J u ne July August Sept Oct Nov

$000 $000 $000 $000 $000 $000 $000

Sales revenue 180 230 320 250 140 120 110

Purchases 135 180 142 94 75 66 57

Administration expenses 52 55 56 53 48 46 45

Selling expenses 22 24 28 26 21 19 18

Taxation payment 22

Finance payments 5 5 5 5 5 5 5

Shop refurbishment - - 14 18 6 - -

Notes:

1. The inventories level at 1 June was $112 000. The business believes it is preferable to maintain a minimum inventory level of $40 000 of goods over the period to 30

November.

2. Suppliers allow one month's credit. The first three month's purchases are subject to a contractual agreement, which must be honoured.

3. The gross profit margin is 40%.

4. Cash from all sales is received in the month of sale. However, 50% of customers pay with a credit card. The charge made by the credit card business to James Records Ltd is 3% of the sales revenue value. These charges are in addition to the selling expenses identified above. The credit card business pays James Records Ltd in the month of sale.

5. The business has a bank loan, which is paying off in monthly instalments of $5000. The interest element represents 20% of each instalment.

6. Administration expenses are paid when incurred. This item includes a charge of $15 000 each month in respect of depreciation.

7. Selling expenses are payable in the following month.

Required

a. Prepare a cash budget for the six months ending 30 November which shows the cash balance at the end of each month.

b. Compute the inventories levels at the end of each month for the six months to 30 November.