The master budget of Levis Limited for 2020 has largely been completed. All that remains is the preparation of the statement of financial position as at 31 December 2020. The management of Levis Limited is also in the process of identifying investment opportunities for 2021. Two projects have been identified and your assistance is required in undertaking capital investment appraisal. QUESTION 1 Use the following information to prepare the Pro Forma Statement of Financial Position of Levis Limited as at 31 December 2020. Where applicable, round off amounts to the nearest Rand. INFORMATION ■ The sales of Levis Limited for 2019 amounted to R6 000 000. The sales for 2020 are expected to increase by R2 000 000. All sales are on credit. ■ Accounts payable must be calculated using the percentage-of-sales method. ■ Accounts receivable is based on a collection period of 30 days. ■ The following ratios are forecast for 2020: Gross margin 25% (Net) Profit margin 10% ■ All purchases of inventory are on credit. Purchases for 2020 are projected at R5 000 000. ■ The business expects to show a net increase in cash of R100 000 during 2020. ■ Machinery with a cost price of R800 000 and accumulated depreciation of R800 000 is expected to be scrapped at the end of 2020. Machinery with a cost price of R4 800 000 will be purchased to replace the machinery that will be scrapped. Total depreciation for 2020 is estimated to be R600 000. ■ 200 000 ordinary shares at R4 each are expected to be sold during January 2020. ■ Dividends of R600 000 are expected to be recommended by the directors at the end of December 2020. The dividends will be paid during 2021. ■ R1 100 000 will be paid to Sen Bank during 2020. This includes R400 000 for interest on loan. ■ The amount of external funding (non-current debt) required must be calculated. ■ The Statement of Financial Position of Levis Limited as at 31 December 2019 is as follows: Levis limited Statement of Financial Position as at 31 December 2019 R ASSETS Non-current assets 4 000 000 Fixed/Tangible assets 4 000 000 Current assets 5 800 000 Inventories Accounts receivable Cash and cash equivalents 3 880 000 1 600 000 320 000 Total assets 9 800 000 EQUITY AND LIABILITIES Shareholders’ equity 4 680 000 Ordinary share capital Retained earnings 3 400 000 1 280 000 Non-current liabilities 4 400 000 Long-term loan (Sen Bank) 4 400 000 Current liabilities 720 000 Accounts payable 720 000 Total equity and liabilities 9 800 000
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The
the preparation of the statement of financial position as at 31 December 2020. The
management of Levis Limited is also in the process of identifying investment opportunities for
2021. Two projects have been identified and your assistance is required in undertaking
capital investment appraisal.
QUESTION 1
Use the following information to prepare the Pro Forma Statement of Financial Position of
Levis Limited as at 31 December 2020. Where applicable, round off amounts to the nearest
Rand.
INFORMATION
■ The sales of Levis Limited for 2019 amounted to R6 000 000. The sales for 2020 are
expected to increase by R2 000 000. All sales are on credit.
■ Accounts payable must be calculated using the percentage-of-sales method.
■ Accounts receivable is based on a collection period of 30 days.
■ The following ratios are
Gross margin 25%
(Net) Profit margin 10%
■ All purchases of inventory are on credit. Purchases for 2020 are projected at R5
000 000.
■ The business expects to show a net increase in cash of R100 000 during 2020.
■ Machinery with a cost price of R800 000 and
is expected to be scrapped at the end of 2020. Machinery with a cost price of R4
800 000 will be purchased to replace the machinery that will be scrapped. Total
depreciation for 2020 is estimated to be R600 000.
■ 200 000 ordinary shares at R4 each are expected to be sold during January 2020.
■ Dividends of R600 000 are expected to be recommended by the directors at the
end of December 2020. The dividends will be paid during 2021.
■ R1 100 000 will be paid to Sen Bank during 2020. This includes R400 000 for
interest on loan.
■ The amount of external funding (non-current debt) required must be calculated.
■ The Statement of Financial Position of Levis Limited as at 31 December 2019 is as
follows:
Levis limited
Statement of Financial Position as at 31 December 2019
R
ASSETS
Non-current assets 4 000 000
Fixed/Tangible assets 4 000 000
Current assets 5 800 000
Inventories
Accounts receivable
Cash and cash equivalents
3 880 000
1 600 000
320 000
Total assets 9 800 000
EQUITY AND LIABILITIES
Shareholders’ equity 4 680 000
Ordinary share capital
Retained earnings
3 400 000
1 280 000
Non-current liabilities 4 400 000
Long-term loan (Sen Bank) 4 400 000
Current liabilities 720 000
Accounts payable 720 000
Total equity and liabilities 9 800 000
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