On 1 January the summary balance Sheet of Mercury Company Ltd. Was as follows:

£ £

Share Capital 40,000 Machinery at cost 80,000

Reserves 20,000 less

Loans 15% 40,000 Accum. Depreciation (19,200)

Proposed dividends 1,000 Stocks 24,200

Overdraft 9,000 Debtors 25,000

110,000 110,000

The following are expected during the next three months:

Sales Purchases Expenses
£ £ £

January 150,000 100,000 20,000

February 200,000 150,000 25,000

March 300,000 280,000 30,000

All sales are on credit and the collections have the following pattern:

During the month of sale 80% (a 4% discount is given for payment in this period)

In the subsequent month 20%

– Payment for the purchase is made in the month of purchase in order to take advantage of a 10% prompt settlement discount, calculated on the gross purchase figures shown above.

– Stock levels are expected to remain constant throughout the period.

– Depreciation of machinery is calculated at a rate of 12% p.a on cost. The appropriate portion for each month January – March is included in the expenses figures above. Expenses are paid for in the month in which they are incurred.

– The proposed dividend will be paid in January.

– The interest for the three months will be paid in March.

Required:

i. Prepare a cash budget for each of the three months January to March.

ii. Prepare a forecast Trading Profit and Loss Account for the period.

iii. Prepare a forecast Balance Sheet as at 31 March.

iv. Briefly explain why the change in cash balance between 1 January and 31 March is not the same as the profit (loss) figure for the period.

v. Briefly explain the functions of a cash budget within an organization.