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Management, Control and Accountability for Financial Resources 

Assignment title: DEV 24/7 I 

Introduction 

Alan and Linda Smith plan to start a new business called DEV 24/7 which will specialise in delivering parcels and post regionally. The business will operate as a partnership and their financial accountant has already drawn up a budgeted Statement of Profit or Loss for the first quarter of their new business venture. This has been created using accruals accounting (also referred to as the matching principle). Budgeted Statement of Profit or Loss for Months 1-3 £ ‘000 £’000 Sales 120.00 Cost of sales (72.00) Gross profit 48.00 Expenses: Heat, light and power 4.50 Telephone and stationery 1.00 Rent and rates 2.00 Insurances 1.50 Wages 6.00 Fuel 3.00 General expenses 1.50 Irrecoverable debts 0.96 Depreciation 0.50 (20.96) Operating profit 27.04 The couple recently met you at a day-long event organised by Columbiana University to help new businesses. They were impressed with your presentation regarding the importance of cash, particularly for new start-ups, and have decided to hire you as their business advisor. You have also established the following important information from talking to Alan and Linda and examining their business plans. They will be investing £60,000 cash into the business and £20,000 will be spent on a brand new post van. The depreciation related to this purchase is shown on the budgeted statement of profit or loss. Sales occur in the month as follows: Month 1 £30,000 Month 2 £40,000 Month 3 £50,000 20% of sales are made for cash, with the balance on two months’ credit. An allowance of 1% of credit sales is made for irrecoverable debts. Purchases are planned as follows per month: Month 1 £36,000 Month 2 £28,000 Month 3 £32,000 Accruals of £500 are included in ‘heat, light and power’. Prepayments have been incorporated into the expenses as follows. Rent and rates: £1,000 Insurance: £2,500 All ‘heat, light and power’ and ‘telephone and stationery’ payments take place in month 3 All ‘rent and rates’ and ‘insurance’ payments take place in month 1 Payments for ‘wages’, ‘fuel’ and ‘general expenses’ are spread evenly over the three months Alan and Linda each plan to take £2,500 from the business in drawings each month. Task – 100 Marks Alan and Linda now require certain information from you which they believe will lead to an effective start for their new business.

Marks

a) The couple have asked you to prepare a cash budget for the first three months of the business and write a brief report giving recommendations.

b) Alan is confused why the profit and cash budget figures are different. Thus he would like some sort of reconciliation between the budgeted profit figure and cash budget amount and a report explaining why depreciation, notional costs and opportunity costs are ignored when preparing cash budgets.

c) Alan and Linda are also keen to know how much their business would be worth in three months and have asked you to prepare the relevant budgeted financial statement.

d) In the future the couple would like to deliver parcels internationally and would like a report explaining the relationship (if any) between cash management and treasury management


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