The approach to preparing the projected profit and loss account in this question is to firstly start with the trading account and follow the following steps.

1.      Outline the trading account and put in the figures given in the questions – sales and opening stock.

2.      Calculate gross profit and cost of sales. This is done by using the gross profit percentage given in the question. The question expresses gross profit as a mark-up or as a percentage of cost of sales. Thus cost of sales = 100%, gross profit = 150% and sales = 250%.

3.      Calculate closing stock. Stock is to equal 50% of the following months demand. But this figure values stock at selling price. Stock must be valued at cost and so it is marked down to cost by multiplying by 100/250. Thus closing stock at the end of November = 50% x Decembers sales x 100/250.

4.      The purchases figure is the balancing figure.

5.      In calculating the figures for the profit and loss account it is important to ensure that only expenses charged are included irrespective of whether they are paid or not

b)      Prepare a monthly projected cash budget for the 5 month period ending 30 November.

Working 1 – Calculation of purchases

The figure for purchases must be calculated for each month as this is required for the monthly cash budget. This requires preparing a trading account and going thought steps 1 – 4 outlined in part (a) above. The purchases figure for any month is paid the following month. Thus the purchases figure for July of €1,000 is paid and is recorded in the cash budget in August.