464 ACCOUNTING FOR MANAGERS
Provided that payback, ROI, RI, NPV and IRR meet any board criteria, the invest-
ment proposal appears to be sound, but inclusion of the additional information
should assist in obtaining board approval.
Case study 7: Carsons Stores Ltd
The first set of questions to be asked is how the level of sales was arrived at.
In particular, have the sales been broken down by department/product? Have
managers been consulted to see if the budget sales figures are achievable? Is
the seasonal increase over the four quarters consistent with past trends, con-
sumer spending patterns and market share? Does it reflect changing prices and
competitive trends?
The second set of questions is in relation to the rate of gross profit (264/ 440 =
60%). In particular, is this broken down by product or supplier? Is the cost of
sales consistent with previous trading? Does it reflect current negotiations with
suppliers? Does it reflect changing prices?
The third set of questions is in relation to expenses. Is the salary budget consistent
with the headcount and approved salary levels for each grade of staff? Has an
allowance for across-the-board (i.e. inflation-adjusted) salaries been built in? Have
all the oncosts been included? Is the rentalfigure consistent with the property
lease? How has depreciation been calculated (e.g. the asset value and expected
life)? Promotional expenses appear to be 10% of sales – is this consistent with
past experience and/or with marketing strategy? Are administration expenses
consistent with past experience and any changes that have been introduced in the
administration department?
The fourth set of questions is in relation to the cash flow. Are all sales for
cash (because there is no assumption about delayed receipts for sales on credit)?
Cost of sales appear to be on 30-day terms, but there is no payment showing for
Quarter 1 – the payments for purchases made in Quarter 4 of the previous year
have not been included. It also appears from the pattern of payments for purchases
that there is no increase or decrease in stock – is this correct given the trend of
increasing sales over the year? All expenses have been treated as cash expenses,
i.e. no allowance has been made for creditors – is this correct? The inclusion of
depreciation expense as a cash flow is incorrect. Have the assumptions as to the
timing and amount of capital expenditure, income tax and dividends been checked
with the appropriate departments?
An adjusted cash forecast, taking into account the missing purchases figure
(assume £40,000) and removing depreciation as a cash outflow, would be as in
Table A4.8.
The previous cash flow of £8,000 has been increased by the non-cash deprecia-
tion expense of £20,000 and reduced by the omission of the estimated Quarter 1
purchases of £40,000. This results in a negative cash flow of £12,000. Importantly,
this raises the question as to whether Carsons has an adequate overdraft facility to
cover the negative cash flows in the third and fourth quarters. Due to the errors,
this was not disclosed by the trainee accountant’s cash forecast.