Question Tag: Cash Forecast

Omegboeji Nigeria Limited is a trading company that specialises in buying and selling of bulk oil. The company is financed by a capital base of N24 million inclusive of reserves in a mix of 30% and 70% of debt and equity respectively. The company has been in the trading business for the past six years and has consistently adhered to its corporate policy on sales, purchases, and inventory management.

The company’s policy on sales is to ensure that sales proceeds are collected as follows:
(i) Cash Sales is 30% of the monthly sales.
(ii) The balance of the month’s sales is to be collected in the month following sales.

The policy on monthly purchases, which is in agreement with the supplier’s policy, is to pay for all supplies in the month following the month of purchase. The general policy of the company is that purchase cost for bulk oil represents 60% of the corresponding annual sales value while its inventory policy is to reserve 30% of the month’s purchases as closing inventory.

The following information is available for the five years 2013 to 2017:

Additional information:
(i) The company will purchase a motor vehicle in July 2016, which will be paid for in two instalments as follows:

• First payment: 60% of cost in September 2016
• Balance: To be paid in November 2016
  The cost of the motor vehicle is expected to be N7,500,000.

(ii)Annual depreciation for the motor vehicle will be 20% on a straight-line basis. Monthly expenses include annual depreciation for the motor vehicle.

(iii) The cash balance as of December 31, 2014, was N2,500,000.

(iv) The company’s salaries, rent, and expenses will be paid in the month during which they are due.

Required:
a. Prepare a cash forecast for 2015, 2016, and 2017, showing the closing cash balance at each year-end. (10 Marks)

b. Prepare a forecast profitability statement for 2015, 2016, and 2017. (7 Marks)

c. Determine and comment on the forecast liquidity ratio (current ratio) for 2017. (3 Marks)