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 percentage of sales. Thus sales = 100%, gross profit = 65% and cost of sales  = 35%.

3.      Calculate closing stock. Managements policy is to have sufficient stock to cover demand for the following month. This Stock is to equal 100% 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 35% (35/100). Thus closing stock at the end of March = 100% April sales x 35%.

4.      The purchases figure is the balancing figure.

5.      Although the question does not ask for a monthly trading account in part (a) - a monthly cash budget is required in part (b). Thus one needs to calculate the monthly purchases figure to show when theses purchases are paid in the cash budget. This can be done separately as in question 9.6 or when preparing the trading account as below.

b)      Prepare a monthly cash budget for January, February and March

Note

• The cash received from credit sales for January relates to Decembers credit sales. This is given in the opening balance sheet as debtors.
• The purchases figure in January is December’s purchases which is given in the opening balance sheet as trade creditors.
• Depreciation is a non cash item and thus is excluded from the overheads figures

c) Prepare a balance sheet as at 31 March

• The fixed asset figure is calculated as follows

• Debtors = March credit sales
• Creditors = March purchases