Solution Manual for Management Accounting for Decision Makers 10th Edition by Peter Atrill, Eddie McLaney

Solution Manual for Management Accounting for Decision Makers 10th Edition by Peter Atrill, Eddie McLaney

CHAPTER 2
Solution to Exercise 2.2
Davis Travel Ltd
(a) (i) Projected cash flow statement for the six months to 31 March Year 5
Oct Nov Dec Jan Feb Mar
Receipts £000 £000 £000 £000 £000 £000
Deposits 30 90 90 90 - -
Final balance - - 270 810 810 810
 30 90 360 900 810 810
Payments
Payables 180
Non-current assets 50
Loan repayment 20
Loan interest 10
Admin 60 60 60 60 60 60
Commission - 30 90 90 90 -
Other variable costs - - 20 80 60 40
Hotels - - 100 400 300 200
Flights - - 50 200 150 100
Promotion 100 150 150 50 - -
 340 240 470 880 660 480
Cash flow (310) (150) (110) 20 150 330
Opening balance 30 (280) (430) (540) (520) (370)
Closing balance (280) (430) (540) (520) (370) ( 40)
(ii) Projected income statement for the six months to 31 March Year 5
£000
Sales revenue 3,000
Flights (500)
Promotion costs (450)
Hotels (1,000)
Admin costs (360)
Other variable costs (200)
Commission (300)
Depreciation (42)

Atrill, Financial Management for Decision Makers, 10th edition, Instructor’s Manual
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Operating profit 148
Interest charges (10)
Profit for the period 138
(iii) Projected statement of financial position at 31 March Year 5
 £000
ASSETS
Non-current assets (560 + 50 − 42) 568
Current assets -
Total assets 568
EQUITY AND LIABILITIES
Equity
Share capital 100
Retained earnings 338
 438

Non-current liabilities
Borrowings − loans (110 − 20) 90
Current liabilities
Bank overdraft 40
Total equity and liabilities 568
(b) A major problem facing the business is the heavy cancellation charges that will have to be
borne if sales do not meet expectations. Given the low profit margins and weak cash flows of
the business, this obligation can pose a real threat to the viability of the business.
A further problem facing the business is the pattern of receipts and expenditures that it has. The
business must pay large amounts out at the beginning of the season for advertising. As bookings
have not been received at this point, the business is reliant on a large overdraft to meet these
obligations. In the event that the bank withdraws its support, the business would be in grave
difficulties. It would be advisable to seek an injection of long-term funds to put the business on
a sounder footing.
The profit is small in relation to the sales revenue and expenses of the business. A slight
increase in expenses, without a corresponding increase in sales, could wipe out the projected
profits. 

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