Financial Accounting the Kawasaki Limited - Essay Example

Question 1
While preparing the cash budget, the cost of sales has been left out since it is not considered an expense. For the same reasons, depreciation has also been left out. In addition, the quarterly payment of electricity cost and the reduction of the electricity by £ 1,000 every month have been factored in. See appendix 1 (Albrecht 2007, pp. 901).

Question 2
(a): when preparing the profit and loss account, the sales increase by £ 3,000 has been factored in. On a similar note, the quarterly payment of electricity cost and the reduction of the electricity by £ 1,000 every month have been factored in. See appendix 2 (Clarke 2010, pp. 71).

(b): while preparing the cash budget, the sales increase by £ 3,000 per month has been factored in. On a similar note, the quarterly payment of electricity cost and the reduction of the electricity by £ 1,000 every month have been factored in. See appendix 3 (Albrecht 2007, pp. 901).

(c): Working capital includes cash, inventory, marketable securities, and account receivables. It is always advisable for business entities to maintain a sufficient amount of cash, since it is the most liquid asset, to enable an entity’s operations to run effectively. Therefore, cash, account receivables, and marketable securities are types of working capital that are constantly required to carry out the operations of a business entity. Kawasaki Ltd has two types of working capital under its management. They are the account receivables, the inventories, and the cash. Though the inventories are not as liquid as compared to cash, they can be converted to cash when the need arises (Bhattacharyya 2004, pp. 29-50).

The company has a policy in place to regulate account receivables. The policy states that the buyers have 30 days after sales to pay their dues. Therefore, the debtors’ payable period is 30 days. The period is short enough to reduce the amount of cash tied up on debts, thus, increasing the cash available for the company. In addition, the policy improves the revenue generated by the company, thus, improving the net income. Second, the company has formulated a policy that would see the inventory levels reduced during the low-demand season. The policy will see the inventory wastage eliminated; thus, eliminate the cost related to such wastage, thus. Improve the revenue. Third, based on the cash budget for Kawasaki Ltd, the cash balance increases every month. From the cash budget, the cash availability in the company is sufficient enough to support the company’s operations. The cash levels should be high, but not excessively high. Excess cash balance presents the opportunity cost of pursuing profitable business expansion activities. In the event the cash availability falls below the demand level, the company should seek short-term financing options such as bank loans (Chadamiya & Menapara 2013, pp. 35-50).

Question 3
(a): since Kawasaki Ltd is deciding to lease new equipment, the maintenance costs and the cost of depreciation will be eliminated since the lessor will bear such responsibilities. The only cost borne by the lessee is the monthly leasing fee. Another change is that the overheads will be reduced by £ 1. All other factors in the profit and loss account for period Y + 1 have been maintained. See appendix 4 (Accounting for Disposal of Fixed assets n.d., par 1-7).

(b): the net book value of the equipment = (250 – 200) = 50 (the residual value). The accumulated depreciation on the equipment = (250 – 50) = 200. Since the residual value is less than the market price, the company realized a gain on sale (110 – 50) = £ 60. The T account as a result of the transaction is as below.