Accounting Problems at Norton Company Ltd - Case Study Example

Running header: The Norton Company Limited Student’s name: Instructor’s name Subject code: Date of submission The Norton Company Ltd a) The analysis is contained in the attached excel sheet. i) Using old policy November December January February March April May June Sales $200,000 $225,000 $75,000 $95,000 $225,000 $260,000 $242,000 $245,000 Cash sales (50%) $100,000 $112,500 $37,500 $47,500 $112,500 $130,000 $121,000 $122,500 Credit sales (50%) $100,000 $112,500 $37,500 $47,500 $112,500 $130,000 $121,000 $122,500 Collection one month after sales (20%) $40,000 $45,000 $15,000 $19,000 $45,000 $52,000 $48,400 Collection two month after (20%) $40,000 $45,000 $15,000 $19,000 $45,000 $52,000 Total cash receipts $100,000 $152,500 $122,500 $107,500 $146,500 $194,000 $218,000 $222,900 i) Using new policy November December January February March April May June Sales $200,000 $225,000 $75,000 $95,000 $225,000 $260,000 $242,000 $245,000 Cash sales (60%) $100,000 $112,500 $45,000 $57,000 $135,000 $156,000 $145,000 $147,000 Credit sales (40%) $40,000 $90,000 $30,000 $38,000 $90,000 $104,000 $97,000 $98,000 Collection one month after sales (20%) $40,000 $45,000 $15,000 $19,000 $45,000 $52,000 $48,400 Collection two month after (10%) $40,000 $22,500 $7,500 $9,500 $22,500 $26,000 Total cash receipts $100,000 $152,500 $130,000 $117,000 $161,500 $210,500 $219,500 $221,400 iii) November December January February March April May June Purchases $50,000 $250,000 $150,000 Cash payment (50%) $25,000 $125,000 $75,000 One month after purchase (50%) $25,000 $125,000 $75,000 Salaries $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 Selling and administrative expense $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 Bank interest $3,270 $3,132 $3,329 $3,349 $4,584 $5,095 $4,729 $4,329 Total cash payments $118,270 $143,132 $143,329 $118,349 $244,584 $245,095 $194,729 $194,329 iv) November December January February March April May June Cash receipts $100,000 $152,500 $130,000 $117,000 $161,000 $210,500 $219,500 $221,400 Cash payments $118,270 $143,132 $143,329 $118,349 $244,584 $245,095 $194,729 $194,329 Net cash flow ($18,270) $9368 $(13,329) ($1,349) (83,854) (34,595) $24,771 $27,071 Beginning cash balance ($200,000) ($218,270) ($208,902) ($222,231) ($223,580) ($307,164) ($341,759) ($316,988) Cumulative cash balance ($218,270) ($208,902) ($222,231) ($223,580) ($307,164) ($341,759) ($316,988) ($289,917) Monthly borrowing $18,270 $8,902 $22,231 $23,580 $117,164 $141,759 $116,988 $89,917 b). The following is the effect on the cashflows for the period from 1st January to 30th June and the total amount to be collected from the customers (accounts receivables) as at 30th June The attached excel sheet shows an analysis of the cash collection that the company expects to receive from its sales to the customers both using the old policy and the new or proposed policy. Using the old policy, the company expects to collect a total of $1,263,900.00 while when a new policy is introduced; the company will be able to collect a total of $1,312,600.00. This is a significant improvement. This improvement also has a significant effect on the amount of accounts receivables that the company would expect to collect from its customers by the end of June (Josephine, 2014). Using the old policy, a total of $146,400.00 remains uncollected. This amount reduces significantly to $ 97,700.00 on introducing the new policy. This is a significant improvement of $48,700. However, the $97,700 that remains uncollected is still much and hence the company should consider tightening its credit policies further to ensure that its accounts receivables reduce significantly. This will also help it meet its financial obligations without necessarily incurring bank overdrafts since this has further cost implications in terms of bank interests. c). The net profit before tax for the period from January to June assuming that there was no beginning or ending inventories; Norton Company Ltd Projected Income statement For the six months ending 30th June 2015 Projected revenue $1,142,000 Supplies $400,000 Projected gross profit $742,000 Projected expenses Salaries $450,000 Selling and administration expenses $240,000 Bad debts $114,200 Loan interest $31,817 Total expenses $836,017 Projected Net income $94,017 From the above computation, the company is projected to realize a net loss of $94,017 for the six months ending 30th June 2015 d. The steps that the manager could take to ensure that the cash balance of the store remains positive and the ways in which budgeting may assist the company i) As stated above, much of the company’s revenue is not collected. In other words, 10% of the company’s revenue ends up being bad debts. This is an unfortunate situation and hence the company should come up with new policies aimed at addressing this situation. This will ensure that extra cash is collected which will be used in paying for expenses instead of opting for bank overdrafts. Some measures would include adopting a cash only policy or cutting links with those customers who do not pay. The credit policy should also be tightened with an aim of reducing the bad debts amount. In other words, by collecting more money from debtors, the company is likely to run positive cash balances. For instance, if the company’s bad debts lower to 5%, the company will be able to save $78, 350 over the period. This would have a very great effect on the company’s cash balances since it will be used in offsetting the bank overdraft. ii) There should be more marketing activities geared towards increasing sales without necessarily leading to more costs (Eugene, 2009). This should ensure that the firm becomes more profitable. Being more profitable with increased debt collection activity will increase the cash inflows at the company’s disposal. Increased cashflows will mean that the company can operate positive cash balances even after meeting its various financial obligations. iii) The manager should perform a cost analysis that should help in identifying unnecessary costs while cutting other costs. For example, the company could retrench some employees or cut some allowances with an aim of reducing costs and hence cash payments. On the other hand, the company should come up with a strategy of pegging employee pay on performance. For instance, the employees are being paid a monthly salary of $75,000 regardless of the level of activity the company is engaged in. this ought not to be the case. The company should peg its salaries on performance such that when the company makes $75,000 sales as is expected in January, salaries as well as other expenses should be far much less than they are currently. If the company does not affect such a policy, then the owners risk financing it from the bank overdrafts and hence leading to bankruptcy when its performance is not good. Few cash payments will leave some positive cash balances in the company’s accounts. iv) Budgeting will be very helpful in ensuring that the company runs positive cash balances. It is worth noting that the company expects to buy supplies worth $400,000 to be spent in the six month period. However, instead of budgeting to buy the goods evenly throughout the period, they are only purchased during the month of March and May. There is need to plan such huge expenses such that they are planned to occur only when the company knows it expects to have a significant amount of money coming from its sales so that the company does not have a huge spending burden when there is no money (Jared, 2010). It should be noted that the company will still incur normal expenses during these months implying that more than normal cash will be required in this months. Budgeting will help the company ensure that such expenses are planned in such a way that they are even or at least occur during the months that the company expects to have more cash at its disposal. This will mean that the company will not have to go for bank overdrafts when paying for such expenses. Budgeting is of vital importance as it ensures that the company knows how much it expects at any particular times and hence be able to spend within its means. How budgeting can help maintain a positive cash balance in the company Budgeting will help the company’s manager maintain a cash balance as follows; i) It will give the company control over its money- budgeting will be an expression if how the company wants to spend its money and hence eliminating the stress of having to suddenly adjust when the company runs into financial difficulties for having failed to plan initially (CPA, 2011). In this case, budgeting will help the company decide where it will do short time sacrifices in a bid to save some money in anticipation of a huge spending. For instance, if the company expects to buy a lot of stock due to anticipated increased demand, the company may do away with some unnecessary expenses and the money saved could be used in buying the items or in repaying the bank overdraft. ii) The budget will keep the company focused on its money goals- this implies that the company will be able to focus its spending on only those items it considers vital to the attainment of the company’s goals. Where the revenue sources are limited as is the case with Norton, wise decisions on abandoning what might be leading to the company’s failure will help the company ensure a positive cash balance while working hard towards its budgeted performance as far as cash and profitability is concerned. References Josphine, B2014, Introduction to corporate accounting, New York, John Willey & Sons. CPA (2011), Accounting Handbook 2011, Pearson, Australia Jared, B2010, Advanced financial accounting, London, Rutledge. Eugene, H2009, Fundamentals of financial accounting, New York, John Wiley & sons. Read More