The projected statement of financial position (or balance sheet) reveals the end-of-period bal- ances for assets, liabilities and equity. It is the last statement to be prepared as the other two statements produce information needed for this statement.
■ The projected cash flow statement provides the end-of-period cash balance for inclusion under ‘current assets’ (or where there is a negative balance, for inclusion under ‘current liabilities’).
■ The projected income statement provides the projected profit (or loss) for the period for inclusion under the ‘equity’ section of the statement of financial position (after adjustment for dividends). This statement also provides the depreciation charge for the period, which is used to adjust non-current assets.
The format of the projected statement of financial position for Designer Dresses Ltd will be as follows:
Projected statement of financial position as at 30 June
£000 ASSETS
Non-current assets Fittings
Less Accumulated depreciation ___
___
Current assets Inventories
Trade receivables ___
Total assets ___
EQUITY AND LIABILITIES Equity
Share capital
Retained earnings ___
Current liabilities ___
Trade payables
Bank overdraft ___
___
Total equity and liabilities
Fill in the outline projected statement of financial position for Designer Dresses Ltd as at 30 June. When doing so, use the information contained in Example 2.1 and in the answers to Activities 2.4 and 2.5.
Activity 2.7
www.freebookslides.com
PROJECTED STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 45
The completed statement will be as follows:
Projected statement of financial position as at 30 June
£000 ASSETS
Non-current assets
Fittings 30
Less Accumulated depreciation (5)
25 Current assets
Inventories 58
Trade receivables 50
108
Total assets 133
EQUITY AND LIABILITIES Equity
Share capital 50
Retained earnings 19
69 Current liabilities
Trade payables 30
Bank overdraft 34
64
Total equity and liabilities 133
Note: The trade receivables figure represents June credit sales (less the credit card discount). Similarly, the trade payables figure represents June purchases.
Evaluate the performance and position of Designer Dresses Ltd as set out in the projected financial statements. Pay particular attention to the projected profitability and liquidity of the business.
The projected cash flow statement reveals that the business will have a bank overdraft through- out most of the period under review. The maximum overdraft requirement will be £41,000 in April. Although the business will be heavily dependent on bank finance in the early months, this situation should not last for too long. This is providing the business achieves, and then maintains, the level of projected profit and providing it does not invest heavily in further assets.
The business is expected to generate a profit of 9.3p for every £1 of sales (that is,
£19,000/£204,000). The profit of £19,000 on the original outlay of £50,000 by the owners seems high. However, the business may be of a high-risk nature and therefore the owners will be look- ing to make high returns. It is not clear from the question whether the wages (under ‘other costs’
in the income statement) include any remuneration for James and William Clark. If no remunera- tion for their efforts has been included, the level of returns (after wages) may not be so attractive.
Activity 2.8
When evaluating the performance and position of Designer Dresses Ltd, two points are worth making. First, this is a new business and so it may be very difficult to project into the future with any accuracy. The bases upon which the projections have been made must, therefore, be carefully investigated. Second, we must avoid the temptation to make a simple
www.freebookslides.com
46 CHAPTER 2 FINANCIAL PLANNING
extrapolation of projected revenues and expenses for the six-month period in order to obtain a projected profit for the year. It is unlikely, for example, to be double the profit for the first six months.
Can you think why it would be unlikely to be double the profit for the first six months?
Two possible reasons are:
■ the business is seasonal in nature
■ a clear pattern of revenue is unlikely to emerge until the business becomes more established.
You may have thought of others.
Activity 2.9
Looking at the detail
KPMG, the auditing, tax and advisory business, conducts an annual survey of businesses in Germany, Austria and Switzerland. The 2018 survey enquired about various financial prac- tices. One question posed concerned the level of detail of the financial forecasts being prepared.
Figure 2.3 below reveals the responses from the 276 businesses surveyed.
Real World 2.3
Real World 2.3 reveals the results of a survey of businesses in three European countries concerning the level of detail forecasts contain in practice.
Forecast of only I/S 16%
Forecast I/S and SOFP (or selected SOFP items)
33%
Integrated I/S, SOFP and CFS
51%
Figure 2.3 Degree of detail of the financial forecasts www.freebookslides.com