Carol Adams is starting her own retailing business. She has $50,000 available of her own capital to put into the business. She thinks she will also need some bank funding as she would like to borrow a further $40,000 from her local bank and would also like to negotiate an overdraft facility. The bank manager has asked Carol to provide her with a Business Plan that includes a forecast Statement of Cash Flow, Income Statement and Statement of Financial Position for the first year of trading. Carol has asked you to help her draw up these statements and provides you with the following information: Sales are expected to be $30,000 per month. The gross margin on sales is expected to be 25%. She will give two month's credit to her customers. She will also receive one month credit on her purchases. She would also like to purchase sufficient goods for resale so as to have a closing inventory by the end of the year valued at $10,000 at cost. She will take out a lease on some shop premises. The lease will cost $20,000 per year payable annually. Shop fittings are expected to cost $60,000 but are estimated to last five years. She will have to pay the full amount for these as soon as they are delivered. General running expenses of the shop are expected to be $2,000 per month, payable as incurred. Carol will work in the shop herself and would like to draw $1,000 per month out of the business to cover her own living expenses. The loan will be repayable in equal monthly instalments over five years. The interest payable on the loan will be $2,000 per year. Required: a) Prepare an analysis of Carol’s cash position at the end of the first year of trading.

Question
Answer:
To analyze Carol's cash position at the end of the first year of trading, we need to create a Statement of Cash Flow. Here's a simplified version of the statement: Statement of Cash Flow for Carol's Retailing Business (End of First Year) Operating Activities: Cash inflow from Sales: $30,000 x 12 months = $360,000 Cash outflow for Cost of Goods Sold (COGS): 75% of Sales = $270,000 Cash outflow for Operating Expenses: $2,000 x 12 months = $24,000 Cash outflow for Lease Payment: $20,000 Cash outflow for Carol's Salary: $1,000 x 12 months = $12,000 Total Cash from Operating Activities: ($360,000 - $270,000 - $24,000 - $20,000 - $12,000) = $34,000 Investing Activities: Cash outflow for Shop Fittings: $60,000 Financing Activities: Cash inflow from Bank Loan: $40,000 Cash outflow for Loan Repayment: $40,000 / 12 months = $3,333.33 (approximate monthly installment) Cash outflow for Loan Interest: $2,000 Total Cash from Financing Activities: ($40,000 - $3,333.33 - $2,000) = $34,666.67 Net Cash Flow for the Year: ($34,000 - $60,000 + $34,666.67) = $8,666.67 Opening Cash Balance (Beginning of Year): $50,000 Closing Cash Balance (End of Year): ($50,000 + $8,666.67) = $58,666.67 So, at the end of the first year of trading, Carol's estimated cash position is approximately $58,666.67. This analysis takes into account her sales, expenses, loan, loan repayments, interest, and initial cash capital.
solved
general 11 months ago 519