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Adventure Travel Ltd (AT) organises holidays abroad for Irish clients. The company charters planes and books hotels. The charter arrangements are such that the air operators include all Irish transport costs, airport charges and so on in the charter price. The contracts with the hoteliers require them to deal with all local arrangements, including transfers from airports to hotels and local activities. All holidays are booked by clients and paid through Irish travel agents. By having to deal only with airlines, hotels and travel agents, AT is able to be administratively streamlined and, its management believes, efficient and price-competitive.

AT’s holidays are of two types: summer beach holidays and winter sports holidays. The company charges a flat rate for all holidays, distinguishing only between the beach holidays and the winter sports ones. An unusual feature of AT’s holidays is the fact that full payment must be made when booking the holiday. Although this is unusual, AT is able to sustain this policy by being very price-competitive. The management believes that any possible loss of custom through following this policy is outweighed by the knowledge that bookings, once made, are certain from the company’s point of view.

Further information about the company and forecasts for next year is as follows: 

(i) Travel agents deduct a 10% commission from the full price of each holiday before remitting the other 90% to the company at the time of booking. 

(ii) Winter sports holidays have a cost to the customer of €350 each and beach holidays cost €300 each. 

(iii) Flights and hotel accommodation are booked by AT as soon as the booking is received from a customer. Airline charges for both types of holiday are €100 per passenger. Hotel charges are €125 for beach holidays and €150 for winter sports holidays. Both airline and hotel charges must be paid in the month in which the holiday was originally due to be taken. It is not AT’s practice to make any refunds to its clients, irrespective of the date of cancellation. 

(iv) At 31 December 2017 the company has received 660 bookings for winter sports holidays. It is estimated that bookings and cancellations for next year will be as follows:

  

  

Holidays booked

Holidays taken

Holidays cancelled

 

Winter

Beach

Winter

Beach

Winter

Beach

 

Pre-Jan

660

—

 

Jan 

700

150

540

—

40

—

 

Feb 

740

980

520

—

50

—

 

Mar 

120

860

790

—

70

—

 

Apr 

40

660

230

—

20

—

 

May 

—

450

—

200

—

20

 

June 

—

100

—

370

—

30

 

July 

—

80

—

890

—

80

 

Aug 

—

80

—

1,070

—

90

 

Sept 

70

50

—

600

—

60

 

Oct 

110

—

—

—

—

—

 

Nov 

360

—

—

—

—

—

 

Dec 

400

—

—

—

—

—

 

Total

3,200

3,410

2,080

3,130

180

280

 

Combined total

6,610

5,210

460

Winter holidays booked between September and December are not expected to be taken until the following year.

AT’s outline Statement of Financial Position as at 31 December this year is expected to look as follows: 

  

Statement   of Financial Position for Adventure Travel Ltd as at 31 December 2017

 

ASSETS

 

Non-current assets

 

Land   & buildings

210,000

 

Equipment   & furniture

57,000

 

267,000

 

Current assets

 

Prepaid   rates

500

 

Cash

21,200

 

21,700

 

Total   assets

288,700

 

 

EQUITY & LIABILITIES

 

Equity

 

Share   capital 

10,000

 

Retained   earnings

69,300

 

79,300

 

Current liabilities

 

Trade   payables

207,900

 

Accrued   electricity

1,500

 

209,400

 

Total   equity & liabilities

288,700

(v) Salaries at AT will be €20,600 for each month of the ensuing year. These will be paid during the month in which they are incurred. 

(vi) Electricity is expected to be the same as this year at about €1,500 each quarter, payable on 1 January, 1 April, and so on. (Electricity is billed in arrears – in other words electricity for January, February, March is paid for on 1 April.)

(vii) The business rate is also expected to be the same as this year at €2,000 in total, payable in two equal instalments on 1 April and 1 October. (Rates are billed in advance).

(viii) Repairs are expected to cost about €100 each month, payable in the month concerned.

(ix) Depreciation is to be charged at the rate of 20% on the net book valueof the equipment and furniture. No depreciation is to be charged on the building.

(x) Staff will incur costs for travelling on behalf of the company. These are expected to be at the rate of €3,500 each month during the months when holidays are being taken by clients. During each of the other three months, the figure will be €500. 

(xi) The company has always adopted the policy of realising the profit on a particular holiday (i.e. recording the sale and the related expense in the income statement) in the month in which it is taken.

Requirement: 

(a) Prepare a projected month-by-month cash flow statement for the year ended 31 December 2018.

(b) Prepare a projected income statement for the year ending 31 December 2018.

(c) Prepare a projected statement of financial position as at 31 December 2018.

(d) Comment on the projections and recommend five action points to improve both profits and cash flows.