Accounting in Business (Accounting – Financial & Management)
Submitting your Assignment
1. Assignments should be typed, 10 or 11 point font size (Times Roman or similar if possible) double spaced with a 4 cm margin on the right side of the page with the
page size specified as UK A4. All pages must be numbered.
2. use MS Office 2003/2007, therefore any submission from a newer system should be saved using an appropriate format.
Assignment Part A:- Gorton Gardens (40 marks)
Gloria Greene has worked for several years for a regional chain of garden centres, starting as one of the gardeners and rising to branch manager. She has now decided to re-locate to her home town and set up her own business trading under the name of Gorton Gardens Ltd (GG).
She is preparing a business plan that she can take to banks and venture capitalists to seek finance and which will also help to guide her in the process of setting up and starting up the business, and has asked you for your help with the financial part of this (i.e. a budget). As a starting basis, she has put together some initial forecasts and estimates which are outlined below.
The business will consist of a large garden with greenhouses, nurseries, etc. and an attached shop. This shop will sell part of the output from the garden. She plans to sell the rest to 2 different groups of business customers:
(i) businesses with offices and reception areas which they wish to keep decorated with office plants and flowers under ongoing contracts;
(ii) hospitality and similar businesses which will wish to buy plants and flowers for corporate entertainment events, weddings, etc.
She is planning and forecasting:-
shop
office plants
hospitality businesses
Selling price per product*
£3.00
£2.00
£2.50
Credit terms
no credit
(cash sales only)
1 month
2 months
Proportion of total sales
25%
40%
35%
* NB: in reality, businesses like garden centres will undoubtedly have a very wide and diverse range of different products. However for simplicity we shall assume here that GG is planning on the basis of a constant product mix, so that its business can be treated as if it were dealing with only a single product.
Sales: Gloria estimates that in May (her first months trading) she will sell 25,000 products in total. After May, sales will grow at a rate of 4% per month until December, when the business will be mature (assume for simplicity that there is no seasonality in GGs demand).
GGs supplies of raw materials and consumables (i.e. what is ultimately re-sold to GGs customers) will cost £0.80 per product. As a new business, Gloria cannot assume that suppliers will offer her any credit, so to be prudent she is planning on the basis that their invoices will all have to be paid at the time of purchase.
To allow for both possible fluctuations in demand and the time it takes plants to grow, she calculates that she will need to keep in stock at all times sufficient inventory to cover 1 months trading.
Staff costs are forecast to be:-
Gardens, nurseries and greenhouses:
7 people at £10 per hour, each working a 40-hour week
Shop:
3 people at any one time, at £7 per hour
The company will also have to pay a further 25% of this amount in social security and pensions contributions, payable 1 month in arrears. The staff will be employed as from the start of March.
Energy & water: When the business starts trading, the gardens will consume energy and water at 20 pence per product. The shop will also consume energy at the rate of £2 for each hour that it is open for business.
In the period January to April, the gardens and shop will each consume energy & water to the value of:-
gardens
shop
January
£200
£100
February
£200
£100
March
£1,000
£100
April
£2,000
£100
Energy is payable 1 month in arrears.
She plans to open the shop from 9:00 to 5:30 from Monday to Saturday, i.e. 50 hours per week (rounded, for simplicity).
Premises: Gloria has negotiated with a property company to rent a plot of derelict land with some old factory buildings on it, on a 10-year lease at an annual rent of £60,000. This will be payable quarterly in advance. At the end of the lease, the land and any buildings on it will revert to the property company.
The landlord has agreed not to charge any rent for the period January to April, so the first payment will be needed only at the end of April. This will be for the period May-July, with subsequent quarterly payments for August-October, November-January, etc. The property company also requires a deposit equal to one quarters rent at the
full annual rate) as soon as Gloria moves in, i.e. on January 1st, which will be returnable to Gloria only when she vacates the premises.
To make the property fit for purpose for a garden centre, Gloria will need to spend £50,000 on refurbishments to prepare the land, fit out the old factory buildings, and erect greenhouses. This work will be carried out evenly over the period January-March with the cost payable in equal instalments on the first day of each of these months. Included in this total amount is a sum of £20,000 for greenhouses for which the company supplying and installing them guarantees a physical life of at least 20 years.
Business rates (i.e. local government tax on property) are charged at a rate of £25,000 per annum. The property company has agreed to absorb this cost up to the end of the current UK government financial year, which ends on 31st March, but Gloria will have to pay as from 1st April onwards. The charge for the year is payable in 10 equal monthly instalments, from April to January inclusive.
Various equipment costing £80,000 in total will be delivered in March and installed and tested in April, in time to start trading on May 1st. The suppliers will allow 1 months credit after the date of delivery. The equipment is expected to last for 5 years before it will need replacing, with an estimated disposal value of approximately 10% of its original cost.
A delivery van will be purchased in April in time for the start of business on 1st May. It will cost £25,000, to be paid in full at the time of purchase. It is expected to last for 4 years, after which it will be sold for £5,000.
Marketing & advertising:- Gloria considers that she will need to invest £8,000 in marketing and advertising in each of March and April, then at an ongoing rate of £1,000 per month indefinitely into the future. This will have to be paid for as it is incurred, on the first day of each month (i.e. there is no credit).
Financing: Gloria has £50,000 of her own savings plus a further £50,000 that family and friends have offered to invest as shareholders. She also hopes to borrow a further £100,000 on a 7-year loan at an interest rate of 6% per annum, payable monthly. This loan would be taken in two equal instalments, on 1st January and 1st April. It would be on an interest-only basis with monthly payments of interest at the end of each month and no repayments of capital until the end of the loan period.
Any further finance beyond this would have to be borrowed through an overdraft, assuming that the bank will agree to this.
NB: overdrafts are a common form of short-term financing in the UK and many other countries, though not universally. In essence it simply means that your bank has agreed to allow you to run your current (checking) account with a negative cash balance, up to a pre-agreed limit overdrafts are not a separate source of new finance. If in your cash budget you find that the cash balance is negative at any time, simply show it as this. If at the year-end the balance is negative, it should be included in the budgeted balance sheet as a current liability. (NB: for simplicity, assume for this assignment that this overdraft is interest-free).
Gloria will handle the general management, marketing and sales to business customers herself. She does not intend to take any money out of the company during its first year as she has moved back into her parents home and they have agreed to support her whilst she is getting his business started. She does not expect to have any holidays or social life on which she will need to spend any money whilst she is establishing her new business.
Assumptions
For simplicity and to keep this exercise manageable, make the following working assumptions:-
– if you consider that any of the data is incomplete in any way, then make a reasonable assumption but state what you have assumed (this is part of your trail of your workings), and then carry on;
– assume that the business produces only a single product (or that the product
mix is constant, which is effectively the same);
– assume that months 1 and 2 in each quarter (January, February, April, May
etc.) are of 4 weeks, and the third month (March, June, September,
December) is a 5-week month.
– assume 52 weeks in each year;
– ignore tax on profits (i.e. assume that the tax rate is zero)
– ignore any interest that could be payable on an overdraft (i.e. assume that it is interest-free)
– round any odd amounts to the nearest whole pound (do not show pence).
Required
(a) prepare, for Year 1 from January to December inclusive, based on the data and forecasts above:-
(i) a cash budget (NB: not a historic cash flow statement) for the period January to December on a month-by-month basis. This should show the total cash in or out for the year as a whole for each item of receipts and payments, and the closing balances of cash both for each month and at the year-end.
NB: if necessary, in order to be able to complete the cash budget assume that Gloria will be able to borrow as much as she needs to through a bank overdraft.
(ii) a budgeted income statement for the whole of the period January to December (not month-by-month), following the usual financial accounting conventions (e.g. the accruals principle, and concerning the recognition of assets).
(iii) a budgeted balance sheet (statement of financial position) as at 31st December.
Templates are provided in the Appendix below which indicate the structure and layout of these statements. To help in the marking process, it would be appreciated if in your answer you can follow these templates, including the sequence in which different items are dealt with. The various different items should each be shown individually do not aggregate a number of different items under a composite heading such as administrative expenses (for example) as this loses transparency.
40 marks
Appendix
See the suggested formats below for a simple Income Statement, Balance Sheet (Statement of Financial Position) and Cash Budget. Please note that these are not exhaustive examples of everything that should appear in such statements, but are merely simple examples to advise you on the format to use. Please use your Study Guide and textbook for more comprehensive information.
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* The above template covers only 6 months, for brevity. The cash budget that you will need to do in order to complete this assignment will need to cover a full 12-month year.
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Income Statement for a period
£
£
Sales Revenue
x
less Cost of Goods Sold
x
Gross Profit
x
less Expenses:-
Staff costs
Energy
x
Depreciation
x
etc.
x
x
Operating Profit
x
less Interest
x
———
Profit available for shareholders
x
====
Statement of Financial Position as at a date
Non-current assets
£
£
Plant
x
Motor Vehicles
x
x
Current Assets
Inventory
x
Trade Receivables
x
Prepayments
x
Bank
x
x
Current Liabilities
Trade Payables
x
Accruals
x
Short-term Loans
x
x
Net Current Assets
x
x
Long-term Capital
Share Capital
x
Retained Profits (or Losses)
x
Long-term Debt
x
x
Part B (60 marks)
Choose a listed company on which to base your assignment. This may be from anywhere in the world provided that
(i) it is listed on a reputable stock market,
(ii) it prepares its financial statements in accordance with IFRS (NB: this will exclude most USA companies)
(iii) it publishes its financial reports in the English language.
With reference to this companys most recent published financial annual report and whatever further information you consider to be relevant, you are required to:-
(i) identify the amount of the difference between its book value (i.e. its balance sheet value) and its market value at the most recent balance sheet date.
(ii) analyse and explain, as best you can, the most likely reasons for this difference. This should include actual examples of items, transactions, events, etc. that might affect market value differently from book value. At least 4 such examples are expected, supported by evidence and with an indication of the materiality (significance) of each.
Your explanation should where appropriate be related to those relevant accounting concepts which may have affected the amounts stated in the annual report and therefore the companys book value.
Your answer should be supported by an appropriate number of relevant references. These should both be listed at the end, following the usual Harvard convention, and cited at appropriate places in your text to make it clear how you have used them to support your analysis and explanation (merely listing references at the end without citing them in the text adds no value). 3-4 references would usually be expected for an assignment like this, though these would not include either the module Study Guide or the core text for the module, or the annual report of the company you have chosen). You can provide more if you consider these are worthwhile and can demonstrate this. [Hint: you may find that references which reflect investors opinions, such as press reports and analysts reports, could be directly relevant].
Credit will be given to answers which are as specific as possible, whilst recognising that since the market value of a company at any point in time is simply a reflection of the consensus of investors opinions of its future prospects, you will not be possible to pin this down precisely.
NB: you may find that you have more to work with if you choose a company whose market value is significantly different from its book value.
The word limit for this Part of the assignment is 1,200 words (this word limit excludes your list of references). Please state your actual word count for this section at the start of your answer to Part B.
60 marks
Total 100 marks
