Report of candlewick Ltd Assignment

Report of candlewick Ltd
Report of candlewick Ltd

Report of candlewick Ltd

Order Instructions:

You need to produce an initial report to Candlewick. You will need to produce a further report once the business has been trading for six months. The report needs an Executive Summary, a numbered index, font size 11, Calibri or Arial font. All tables need to be placed into an Appendix. Place a footer on your document with your name, student number and page number. The report may have references and a bibliography.

You are an accountant working for an accounting practice and have been asked to help a new client plan and control her business finances. John Wick has started a business selling candles in Bath. Candlewick Ltd has been open for one month (January, 2013). It is located in a busy part of the town, near the Pump House – a major tourist spot, but where there is at least one other established competitor.

1. Cashflow Forecast (6 marks)

Construct a cashflow forecast for Candlewick Ltd. The owner has produced the following figures which he has researched and believes are correct.

1. An initial £10,000 capital has been placed into the business.
2. John buys candles from a local supplier for £15 per box, and sells them online for £20 per box. The supplier will allow one month’s credit. This will represent 75% of the business’s revenue. John will allow customers two month’s credit.
3. The shop in Bath will represent the final 25% of the revenue, and will deal in cash sales.
4. Expected purchases: January – February £400; March £500; April £560; May £600; June £600
5. Expected sales: January – February £400; March £500; April £560; May £600; June £600
6. Equipment including van is purchased on the 1st January cost £13,000, but will not be paid for until February 2013.
7. Rent is paid £150 per month, payable at the end of every month.
8. Advertising will be £250 per month payable in arrears.
9. Telephone and internet expenses will be £450 per quarter payable at the end of each quarter, the first payment being at the end of March.
10. Printing, postage, stationery, which include packaging, are estimated to be £600 per month apart from January, and will be payable in cash.

2. Working Capital Requirements (10 marks)
• Analyse the cashflow forecast. Which month does John need to add additional cash?
• Outllne the main options for sources of funds available to Candlwick Ltd.
• Should John look at a bank loan, loans are available for start-ups of £18,000, £6,150, £5,100, £4,800, £3,700. Interest rates are 7.4% and can be fixed for a two year maximum.

3. Actual Trading Figures (12 marks)
Candlewick has now been trading for six months, and you have been given the following figures. Prepare another cashflow statement. Conduct a variance analysis. What have been the main differences?
1. Sales (cash): January £1,600; February £1,800; March £2,000; April £3,500; May £4,000; June £4,500
2. Sales (credit): January £0; February £0; March £4,800; April £5,400; May £6,000, June £7,800
3. Purchases: January 0, February £6,000; March £6,000; Apirl £7,500; May £8,400; June £9,000
4. Equipment including van: £13,000 paid for in February.
5. Rent: January – June £500
6. Advertising: January – June £50
7. Telephone and internet: January – June £450 payable quarterly (first payment end of March).
8. Printing and postage: January £0; February £100 – June £ 100
9. Interest payments: January – June £40
10. Salaries: January £0; February – May £500; June £660

4. Trial Balance for Candlewick Ltd (9 marks)
Using the cashflow balances, construct a trial balance.

5. Prepare an Income Statement for Candlewick Ltd. (6 marks)
The following adjustments need to be taken into consideration:
1. Closing inventory is valued at £750.
2. Rent, advertising, telephone and internet, printing, postage and packaging and salaries are allocated 50% to distribution costs, 50% to administrative expenses.
3. Acrrued expenses for Advertising £100 and £200 telephone and Internet.
4. Printing postage and packaging are prepaid by £100.
5. Equipment is expected to be kept by the business for 4 years with an estimated residual value of £1,000, using the Diminishing Return or Reducing Balance method. Depreciation will be charged. Depreciation will be charged in the following ways: 50% to distribution costs; 50% to administrative expenses.
6. An allowance for doubtful debts will be based on 10% trade receivables. This allowance will be charged 100% to administrative expenses.
7. Income tax to be paid by 31 January 2014 will be £8,970 (30%).
8. John is the only shareholder, however, he will leave all profits in the business to help it grow, rather than take some out in the form of a dividend.

Using the actual cashflow forecast (Activity 3), and trial balance, construct an Income Statement for Candlewick Ltd.

6. Prepare a Statement of Financial Position for Candlewick Ltd (17 marks)
1. Accounts receivables include those purchases in May and June.
2. Accounts payable need to be included – June’s payment.
3. Identify closing inventory figure.
4. The cashflow statement shows a surplus figure, which is an asset.
5. John invested capital into the business and a loan.
6. The profit figure has been calculated.
7. There will be a tax liability (30%).
8. Acrrued expenses for Advertising £100 and £200 telephone and Internet.
9. Printing postage and packaging are prepaid by £100.
10. Equipment is expected to be kept by the business for 4 years with an estimated residual value of £1,000, using the Diminishing Return or Reducing Balance method. Depreciation will be charged. Depreciation will be charged in the following ways: 50% to distribution costs; 50% to administrative expenses.
11. An allowance for doubtful debts will be based on 10% trade receivables. This allowance will be charged 100% to administrative expenses.
12. Using the actual cashflow forecast (Activity 3), construct an Income Statement for Candlewick Ltd.
13. Income Tax is 30%.

• From the Income Statement, analyse Assets (Equipment, cash owed and closing inventory) compared with Liabilities (equity, loan, cash owed to supplier and tax authorities).
• What advice can you John regarding the difference between the cashflow figure and income statement figure?

6. Ratio Analysis (24 marks)
• Using a minimum of eight appropriate ratios, investigate the profitability of Candlewick Ltd.
• What limitations might there be on these figures?
• What would you advise John to do about the future of his business?
• Word limit 1000 words.

Presentation and English (5 marks)
Referencing (5 marks)


Report of candlewick Ltd

Contents                                                                    pages                                                                                                                                                                 

Executive Summary…………………………………………………………………………..3         


Forecasted Cash flow 1………………………………………………………………………2


Forecasted cash flow 2………………………………………………………………………5


Trial Balance…………………………………………………………………………………..6


Income Statement………………………………………………………………………………7


Statement of financial Position………………………………………………………………7


Ratio Analysis…………………………………………………………………………………..8



Executive Summary

Candlewick limited is a company that trades in candles. The company purchases candles and resells them at a mark-up that constitutes its profit margin.  John Wick is the entrepreneur who operates the business. In January 2013, he advanced a capital of £10,000 to his candle business. The forecast however revealed a very different scenario.


Candlewick   Ltd
Cash flow  Forecast
Jan Feb Mar Apr May Jun
£ £ £ £
Sales 400 500 560 600 600
Purchases 0 400 500 560 600 600
van 13,000 0 0 0 0
Rent 150 150 150 150 150 150
Advertising 250 250 250 250 250
Tel & Int 0 450 0 0 450
Printing & Stationery 600 600 600 600 600 600
Total Expenses 750 14,000 1,850 1,500 1,560 2,050
Total income receivable 0 0 0 300 375 420
Net cash flow -750 -14,000 -1,850 -1,200 -1,185 -1,630
Opening bank balance 10000 9250 -4750 -6600 -7800 -8985
Closing bank balance 9250 -4750 -6600 -7800 -8985 -10615



  1. The candlewick forecast cash flow will have a deficit balance in the first month of operation as the debtors have been allowed two months credit upon which they can make their payments. The sales in January will most likely be paid in March while the February sales will be received in April. The rental payments, Advertising costs, Printing & Stationary are constant and they amount to £1000. Rent can be classified as a fixed expense but advertising & postage and printing are variable expenses. (Faul, du Plessis & van Vuuren 2001) The cost of purchasing the van can be classified as an asset and only its depreciation is chargeable to income and expenditure while its Book value is depreciated according to the rate of depreciation agreed before it’s posted to the balance sheet. (Drury 2004)

John needs to add some additional cash in February to cater for the payment of the Van. The operational cash that has been banked at the bank will be inadequate to pay all the expenses in February together with the van purchases’. (Garrison, Noreen & Brewer 2006)

The major options open for John to fund his company are limitless. The bank can offer some financial assistance by offering some funds but at an agreed rate of interest. The other option would be to invite a partner who can contribute a similar amount of capital that can be used as operation cash for a certain amount of shares in the candlewick ltd. (Hansen & Mowen,  2005) John can also borrow funds from friends or family members to finance his company. The other option is to register the company as a public limited company and enlist it to a stock exchange so as to float its shares to the public. The funds can be used to fund the company’s operations but the problem is that it would take some time before the company can be registered, float its shares and obtain the required minimum amount of shares to commence trading and finally to obtain a trading license. (Marshall, McManus & Fiele 2004)

The recommended start up loan would be £3700 at 7.4%.

  1. The variance analysis for John’s business between the forecasted and the actual results reveals that the closing balances would have very large disparities. In January 2013, the closing balance would higher than originally estimated. The actual closing balance is £11,600 while it was estimated to be £9250. The budgeted amount would a have a deficit of £2350
Candlewick   Ltd
Cash flow  Forecast 2
Jan Feb Mar Apr May Jun
£ £ £ £ £ £
Credit sales 0 0 4800 5400 6000 7800
Cash sales 1,600 1800 2000 3500 4000 4500
Purchases 0 6000 6000 7500 8400 9000
van 13,000 0 0 0 0
Rent 0 100 100 100 100 100
Advertising 10 10 10 10 10
Tel & Int 0 225 0 0 225
Interest payments 40
Printing & Stationery 0 100 0 0 0 100
Salaries 0 0 0 0 500 660
Total expenses 0 13,210 6,335 6,110 8,110 9,495
Total income receivable 1,600 1800 2000 3500 8800 9900
Net cash flow 1,600 -11,410 -4,335 -2,610 690 405
Opening bank balance 10000 11600 190 -4145 -6755 -6065
Closing bank balance 11,600 190 -4,145 -6,755 -6,065 -5,660


 In February, the closing balance is forecasted to be deficit of £-4750 which the actual balance resulted in an excess of £190. The variance was occasioned by the balance brought forward from January and the actual cash payments that were made in January and February. The other months were also affected by the inclusion of the cash payments which could not be exactly forecasted. The actual total expenses were also very high compared with the forecasted amounts. (Gitman 2000) The actual expenses amounted to £43260 instead of the forecasted £20960. The Income receivable amounted to £1095 instead of the actual £27600. The net cash flow in June was a deficit of 15660 of the budgeted deficit of 19865. (Harrison & Hongren 2001)


Candlewick   Ltd
Trial Balance
Balance brought forward 4825
Credit sales 24000
Cash sales 17400
Purchases 36900
van 13000
Rent 500
Loan 1081
Advertising 50
Share capital 3679
Tel & Int 450
Interest payments 40
Printing & Stationery 200
Salaries 1160
Closing balance 10,835
Totals 57060 57060

 (Garrison & Noreen 2003)


Candlewick   Ltd
Income and Expenditure
Credit sales 24000
Cash sales 17400
Total sales 41400
Purchases 36900
Less closing stock 750 36150
GP 5250
Administrative Expenses 3880
Distribution exp 2500
Income tax 30% 8970
Total expenses 15350
Net Profit -10100


Candlewick   Ltd
Statement of Financial Position
Non Current assets Cost Dep NBV
Property, plant & Equip 13000 3000 10,000
Total non- current assets 10,000
Current Assets
Inventories 750
Trade receivables 12420
Cash -10,835
Prepayments 100
Total current Assets 2,435
Total Assets 12,435
Equity and Liabilities
Share capital 3679
Deficits -10100
Total Equity -6421
Non-current liabilities
Long term borrowing 1081
Total non-current liabilities -5340
Current liabilities
Trade Payables 9000
Accrued expenses 300
Current tax payable 8970
Total current liabilities 18270
Total equity and  liabilities 12930


  1. The major differences between the cash flow figure and the income statement is that the cash flow includes the purchases of assets such as the van while the income statement is restricted to revenue items only which excludes the assets and liabilities or prepayments. (Gill & Johnson 1997)


Financial Ratios June
Current Ratio Total Current Assets/Total current liabilities 0.64
Quick Ratio TT Current Assets – inventories /total current assets 0.60
Receivable turnover Annual credit sales/average receivables 1.93
Inventory Turnover Cost of goods sold/Average inventory 48.20
Asset turnover Sales/Average total assets 3.33
Times interest earned EBIT/Annual Interest Expense -28.50
Debt to total Asset Debt/Assets 0.09
Profit margin on sale GP/sales 0.13


The current ratios indicate a grim future for Candlewick limited. (Flynn 2003) The standard ratios for current assets and the current liabilities is a ratio of 2:1. The ratio of candlewick is 0.64:1. This means that the company cannot pay off its liabilities. The quick ratio suggests that the company is still operating below the required minimum ratio of 1:1 It cannot meet the immediate obligations that may face the company. The profit margin on sales is also very low.

The major limitations on this figures is that they represent a very large variance between the actual results and the forecasted results.

John should advertise and market his business to draw more business and also diversify in other business that may supplement his income besides the income from the Candlewick limited.


Drury, C., 2004, Management and Cost Accounting. Thomson Learning.

Epstein, M.J. & Lee, J.Y., 1999, Advances in management accounting, 8. Stanford, Con.: JAI Press.

Faul, M., du Plessis, P.C. & van Vuuren, S.J., 2001, Fundamentals of cost and management accounting. Durban: Butterworths.

Garrison, R.H., Noreen, E.W. & Brewer, P.C., 2006, Managerial accounting (11th Ed) Boston: McGraw-Hill.

Hansen, D.R. & Mowen, M.M., 2005, Management accounting (7th Ed) Mason, Ohio: Thompson/ South-Western.

Harrison, W.T. & Hongren, C.T., 2001, Financial accounting (4th Ed). Englewood Cliffs, NJ: Prentice Hall.

Marshall, M., McManus, W. & Fiele, D.F., 2004, Accounting: what the numbers mean. Boston: McGraw-Hill.

Flynn, D., 2003, Understanding finance and accounting (rev. 2nd Ed). Durban: Butterworths.

Garrison, R.H. & Noreen, E.W., 2003, Managerial accounting (10th Ed). Boston: McGraw-Hill.

Gill, J. & Johnson, P., 1997, Research methods for managers (2nd Ed). London: PCP Publishing.

Gitman, L.J., 2000, Principles of managerial finance (9th ed.). Menlo Park, Calif.: Addison Wesley.


Credit sales 24000
Cost of sales 36150
EBIT -1140
GP 5250
Earnings -10150
Taxes   8970
Interest 40
Sales 41400

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