03 - john darlington_21 tocpa_uk_11 nov 2015_for web
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03 - John Darlington_21 TOCPA_UK_11 Nov 2015_for WebTRANSCRIPT
Flow Accounting
John Darlington, Value Flow, & University of Buckingham, UK
11th November 2015
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John Darlington
John Darlington is a management consultant specialising in TOC & Lean applications applying the principles across the entire enterprise, from design to delivery.
He develops programmes of practical implementation integrating improvements to the physical flow of the product or service, and the information flow that converts customer demand into actions.A qualified accountant John won the Toyota “Prize for Best New Idea” at the South African Production and Inventory Control Society and has been a guest speaker at APICS.
Career historyJohn worked for AlliedSignal Turbochargers from 1986 – 1999. During this time, he held a variety of roles including Finance Director and IT Manager of the Original Equipment site and Plant Manager of the Turbocharger European Aftermarket. A Director of AlliedSignal Limited John qualified in Constraint based management with Goldratt Institute and as a Lean and Six Sigma Expert through Renault Institute. As Kaizen Director of United Engineering Forgings, the largest independent forging and machining group in the UK, John led the systematic introduction of Improvement methodologies across the 6 U.K. sites with particular emphasis on practical application to improve bottom line performance.
He combines application with teaching for the University of Buckingham where he is Director of the MSc in Lean Enterprise and was appointed Visiting Professor of Practice at The University of Wales Newport Business School in June 2011.
Contact details: [email protected]+44 (0) 7811 440847
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Formula and Experience
Though their particulars are thoseThat each particular artist knowsUnique events which once took place Within a unique time and space In the new field they occupy The unique serves to typifyBecomes though still particular An algebraic formulaAn abstract model of events Derived from dead experimentsAnd each life must itself decideTo what and how it be applied
W.H. Auden New Year Letter 1940
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Observations about Improvement Activity both Operational and Accounting
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Most “improvement” activity does not improve the bottom line! Why?
Local efforts tackling isolated parts of the system to no overall beneficial effect
Poor understanding of demand and capacity: plant not being run to maximise the flow of value through the bottleneck
Naïve application of “lean” tools and techniques: often in the wrong place at the wrong time
Inappropriate delegation of leadership for improvement
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There is a problem with conventional accounting systems
Actively work against flow
Lead us to the wrong decisions
Are confusing and complex to people
1. Encourage bigger batches to reduce “unit costs”
2. Treat bottlenecks and non bottlenecks the same
1. Focus on costs instead of value2. Encourage local efficiencies
1. Give credit for over production2. Encourage “cost reductions” which often
prove to be mirages
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What is Flow Accounting?
Flow accounting is a management accounting methodology. The objectives of a flow accounting implementation are -
– To show in monetary terms how the systems interacts with the outside world– To make sure that sub systems understand how to contribute positively to the overall goal of the
organisation – To assist in working out the scope for improvement in money– To encourage the right behaviours.
It is based on “common sense” and developed out of practical application.
It is not a new way to allocate overhead
It does emphasise growth of value adding rather than “cost reduction”
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Structure of the Flow Accounting Process
•Financially quantified current state
• Financial consequences of the future state agreed
Tackle the whole in one
Break down into chunks
Clarification of the financial consequences of the current state
Quantitative financial assessment of the initial future state
Big Picture Financial Mapping - a diagnosis of the Current State
Demand Analysis Capacity Analysis Inventory AnalysisPolicy Analysis
Value Flow Accounting & Decision Making
Value Flow Performance Measures
Data Acquisition Structure & Modelling
Flow Accounting Process
Demand
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Completing the Current State Map
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Typical Feedback
Flow Accounting Process
What is the profile of the demand and how well are promise dates made and adhered to?
Demand AnalysisDemand
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Demand Categories
Type Description
Normal Continuous history with relatively high volumes, can be forecast with confidence. (Up to 2 periods of zero demands)
Erratic Intermittent history with medium to high volumes, can be forecast with reasonable confidence (Between 3 and 6 periods of zero demand)
Lumpy Very intermittent history with medium to high volumes, can be forecast but with limited confidence. Preferably not made to stock. (Between 7 and 10 periods of zero demand)
Management Control
New
Very intermittent and unpredictable demand. Should not be made to stock. (Between 10 and 11 periods of zero demand)
More than 6 periods with zero demand but with 4 most recent periods with demand greater than zero
All Demands Zero No demand in the last 12 months
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Demand Analysis: Normal
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Demand Analysis: Lumpy
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Demand Analysis: Beltline
39
29
19
4
35
0
10
20
30
40
50
Normal Erratic Lumpy New Man Control
Beltline
No of Items 31.0%
23.0%
15.1%
3.2%
27.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Normal Erratic Lumpy New Man Control
Beltline
No of items as a %
47194
2099 697 649 1450
10000
20000
30000
40000
50000
Normal Erratic Lumpy New Man Control
Beltline
Average Demand Per Month92.9%
4.1% 1.4% 1.3% 0.3%0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Normal Erratic Lumpy New Man Control
Beltline
Average Demand as a %
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OTIF (On Time In Full)
Flow Accounting Process
Demand AnalysisDemand
To maintain “service” we can buffer with capacity or inventory. WIP and Finished Goods give us a good idea about how well capacity is being deployed.
Flow Accounting Process
Demand AnalysisDemand
What are the cash consequences of current flow practices?
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Working Capital Relationships Current State
September End Inventory of $211m
Finance days
111
Inventory Pipeline in Days
Raw WIP Fin Gds
24 100 7
Debtor days
30
Payables days
50
Flow Accounting Process
Demand AnalysisDemand
What is the pareto of the real money being spent?
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Pareto Works……….. Use it!!
Key Drivers Sensitivity Analysis
P&L Actual 2010 Eur 000’s
Sales 30899
Material Cost 11810
Throughput 19089
Labour 6387
Staff 2967
Depreciation 1566
Energy 1438
Purch Servs 1181
Freight 1090
Consumables 1029
Maintenance 748
Other variable 652
Toolcrib 495
Loss prevention 373
Op Profit/(Loss) 1163
A 5% Change for better effects the bottom line by: -
Flow Accounting Process
Demand AnalysisDemand
Key Performance Indicators and Policies drive behaviour
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?????
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Cause and effect analysis (speculation for feedback)
Medium to strong negative correlation of -0.64. Bonus Incentives (25%) to make volume of parts over the right mix of parts could be a contributory factor (If Null
were true a correlation as great as this would occur by chance alone with a probability of less than 2.5%)
Flow Accounting Process
Demand AnalysisDemand
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A Case Study example “It’s too expensive to stop”
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Big Picture Financial Mapping
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Draw with a logical flow in mind considering the major dependencies. Do NOT trying to show real movements which might come out as a “spaghetti” diagram.
This is not the objective of a Big Picture Financial Map
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Big Picture Financial Mapping
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Add the main routes of products flowing through production to final customers
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Big Picture Financial Mapping
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
We only MAKE money one way so let’s record on our BPFM how much money different parts of the
process generate for us
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
OTIF 82% by week
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Big Picture Financial Mapping
Where is the inventory tied up in the system?
OTIF 82% by week
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
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Big Picture Financial Mapping
How do we turn the inventory into time? Days of sales cover?
OTIF 82% by week
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
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Big Picture Financial Mapping…….How
can we convert the production units
into days of sales cover?
Month Accounting days
Opening
Jan 20
Feb 21
Mar 23
Apr 19
May 22
Jun 20
Jul 17
Step 1 find the accounting data and decide on the alignment i.e. the inventory opening position is to be compared with future sales
£000's £000's £000's £000's £000's £000's £000's £000's £000's
Raw Materials Inventory FG Inventory WIP Working Inventory Sales Mat Cost D Lab Variable Fixed Overhead Cost of Sales
419438 348769 1048765 1397534
421,804 365,010 1,103,376 1,468,386 846,293 366,758 146,987 115,865 270,987 900,597
420,478 352,350 1,073,247 1,425,597 1,089,873 472,838 150,236 117,834 274,900 1,015,808
411,332 369,041 1,150,408 1,519,449 1,174,546 509,388 152,673 119,874 281,009 1,062,944
461,278 375,689 1,009,595 1,385,284 950,220 412,148 141,682 113,351 264,981 932,162
430,780 360,554 1,107,902 1,468,457 964,689 418,710 148,999 115,923 230,931 914,563
476,068 361,049 1,083,007 1,444,057 1,067,380 460,462 148,765 112,347 260,432 982,006
530,740 353,199 1,075,086 1,428,285 871,243 376,754 140,354 111,946 249,870 878,924
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Big Picture Financial Mapping…….How
can we convert the inventory in tonnes
into days of sales cover?
Step 2 perform “smoothing” to reduce the impact of different accounting days in each period and restate the sales, material cost of sales, and full cost of sales
£000's £000's £000's
Month Accounting days Smoothed Sales
Smoothed
Cost of Sales
Smoothed
Material
Cost of
Sales
Smoothed
Raw
Material
Days
Smoothed
MLT in
Days
Smoothed
Finished
Goods in
Days
Smoothed
Working
Inventory
Days
Smoothed
Total
Inventory
Days
Opening
Jan 20 846293 900597 366758 34.31 34.94 11.62 46.55 80.86
Feb 21 1037974 967436 450322 28.10 34.22 11.32 45.53 73.63
Mar 23 1021344 924299 442946 28.48 34.83 11.44 46.27 74.75
Apr 19 1000231 981223 433840 28.44 35.17 11.28 46.46 74.90
May 22 876990 831421 380645 36.35 36.43 13.56 49.98 86.34
Jun 20 1067380 982006 460462 28.07 33.85 11.01 44.86 72.93
Jul 17 1024992 1034028 443240 32.22 31.42 10.48 41.90 74.12
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Big Picture Financial
Mapping…….How can we convert
the inventory in tonnes into days
of sales cover?
Raw material £430780 x 30.5 days =
Smoothed raw material cost of sales £460462
Work in progress £1107902 x 30.5 days =
Smoothed cost of sales £982006
Finished goods £360554 x 30.5 days =
Smoothed cost of sales £982006
Step 3 apply the “smoothed” figures to the inventory balances at the start of the month (or end of the prior month).
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Big Picture Financial Mapping
Who is responsible for what?
OTIF 82% by week
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
Raw material
28.10 days
Finished goods
11.30 days
Work in Progress
34.70 days
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Big Picture Financial Mapping
If responsibility followed flow it would look like thisOTIF
82% by week
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
Raw material
28.10 days
Finished goods
11.30 days
Work in Progress
34.70 days
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Big Picture Financial Mapping
What are the operating expenses of running the production system per annum?
Overheads £3048k
OTIF 82% by week
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
£2255k£366k
£628k
Raw material
28.10 days
Finished goods
11.30 days
Work in Progress
34.70 days
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Big Picture Financial Mapping
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM12670
1610
616
3760
1574
1489
786
1759
1707
2009
Fgds604
Fgds416
Fgds1290
Overheads £3048k
£2255k£366k
£628k
What about looking at the due date performance & inventory lead times by the
distinctive streams (Jan Sales Dec Inventory)
Raw material
28.10 days
Finished goods
11.30 days
Work in Progress
34.70 days
The second level of inventory analysis; the average is broken down into its constituent parts
OTIF 82% by week
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Big Picture Financial Mapping
ControlCooled
Heat Treatment
Finish –North Line
Finish –South Line
Joy Mining Line
Die Shop
Cutting
Induction Heating
Forge
Shotblast
Shotblast
Con. Cooled £000’s
Sales 9263
Material costs(4179)
Throughput 5084
Heat Treated £000’s
Sales 2738
Material costs(1023)
Throughput 1715
RM30.8d
3.9d
1.5d
11.4d
19.2d
4.5d
9.6d
5.3d
5.2d
24.5d
Fgds1.8d
Fgds1.3d
Fgds15.7d
Overheads £3048k
£2255k£366k
£628k
What about looking at the inventory lead times by the distinctive streams (June results)
Raw material
28.07 days
Finished goods
11.01 days
Work in Progress
33.85 days
What does this tell us….. It is “screamingly” obvious where the biggest issue is at present
CC OTIF 90% by week
HT OTIF 72% by week
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Big Picture Financial Map information output
We are looking for Trends and Relationships which may not have been explicitly analysed before linking
commercial considerations to operations and financial information
Sales over time in units and value.
Inventory over time broken down into: -
– Raw materials days
– Work in progress days
– Finished Goods days
Hours worked
Dependencies
Rules about production organisation
Policies
– Obsolete or slow moving inventory
– Planned level of utilisation of resources
– How do we decide on the number of work centres
Working Capital
– Debtor days
– Creditor days
– Buffering
The list is not exhaustive………………….
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Quantifying the Big Picture Financial Map
We can now complement our sales and operational map with financial data we have analysed:
–Sensitivity to making money
–Working capital profile
–Inventory in terms of days of sales cover
–Stock age profiles at different parts of the system
–Trends on labour hours and work in progress
–Trend lines for performance overall
The data helps us quantify the judgements we have made whilst compiling the material and information flows.
By contrasting these measures with the desired level of business performance, we can begin to understand the scope for improvement necessary to achieve the goal – and whether improvement must be attempted in stages to ensure success.
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Big Picture Financial Mapping…….What other financial
information can we develop that helps us focus on the
most important aspects of the business?
Step 6 choose a reasonable period of time like the last 12 months and get hold of the data regarding what the company really generated in terms of sales and what it really spent its money on. Arrange it in terms of impact a bit like this: -
Step 6 Now apply a factor to each of the headings and ask yourself what is the impact on the bottom line if this figure was to improve by “X” %?
Pick a low number like 5%, we want people to understand that relatively modest real improvements can make a big difference to the bottom line.
Step 6 check out the completed sensitivity slide on the next page, what does it say to you about where to focus to make the most impact on the bottom line?
Sales 12001200Material costs 5202000Throughput 6799200Overheads 2160000Wages 1722864Consumables 1236000Sales Org 450000Depreciation 380000Warranty 120012Head Office 208000Freight Out 20000Profit 502324
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Key Drivers Sensitiv ity Analysis
Sept YTD Profit and Loss Actual
£’s
A 5% Change for better effects the bottom line by: -
Sales 12001200Material costs 5202000Throughput 6799200Overheads 2160000Wages 1722864Consumables 1236000Sales Org 450000Depreciation 380000Warranty 120012Head Office 208000Freight Out 20000Profit 502324
1000
10400
6001
19000
22500
61800
86143
108000
339960
260100
600060
Freight Out
Head Office
Warranty
Depreciation
Sales Org
Consumables
Wages
Overheads
Throughput
Material costs
Sell Price
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Working Capital Relationships Current State
June Inventory of £1.4 million
Finance days
63
Inventory Pipeline in Days
Raw WIP Fin Gds
28 34 11
Debtor days
50
Payables days
60
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Measure of Improvement
Manufacturing Lead Time as Measured by Days Inventory in WIP
28.129.0
26.3
29.1
18.420.1 20.0
22.9
16.7
13.0
8.9
12.4
14.6
9.07.8
0
5,000
10,000
15,000
20,000
Period
No. of
Piece
s
0
5
10
15
20
25
30
35
Days
Closing WIP (Pcs) 10409113441250712693 8812 9360 7336 8739 7633 6781 6159 5136 7352 4945 4207
Sales (Pcs) 111071174814275130851440113945110101144013700156002075912476151041647316216
WIP Days 28.1 29.0 26.3 29.1 18.4 20.1 20.0 22.9 16.7 13.0 8.9 12.4 14.6 9.0 7.8
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
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Working Capital Relationships Future State
June Inventory of £1.4 million
Finance days
63
Inventory Pipeline in Days
Raw WIP Fin Gds
20 7 5
Debtor days
50
Payables days
60
ThroughputOperating Expense
InventoryOTIF
95% by week
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Summary Flow Accounting
Current Cost AccountingActively works against flowLead us to the wrong decisionsAre confusing and complex to people
Flow Accounting Analyses and Interprets accountancy data in an different way resulting in Flow:Improved customer serviceReduced lead timesFocus on Throughput and total costClearer understanding of the operating expenses of current capacityImproved bottom line results
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Next Steps for Flow Accounting
49
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P Q
D15 min
PurchasePart
£5/unitD
5 min
C10 min
C5 min
B15 min
A15 min
B15 min
A10 min
RM1£20/u
RM2£20/u
RM3£20/u
Many TOC people will recognise P & Q
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P Q
SALES 240000 2000 600
COGS 207734
STANDARD MARGIN 32266
Sell Price 90 100
Standard Material COG 114000 90000 24000
Actual Material Costs 114000
Material price variance 0
Direct Labour 40000
Labour Recoveries 31912
Labour Under Recovery -8088
Depreciation 8000
Salaries 56000
consumables 10000
Rent and Rates 6000
total 80000
Overhead Recoveries 63823
Overhead Under Recovery -16177
ACTUAL PROFIT/LOSS 8001
PROFIT & LOSS ACCOUNT FOR WEEKS 2 TO 22
LABOUR
OVERHEAD
Work in Progress 17125 Creditors 65250
Raw Material 15200 Bank Account 52400
Finished Goods 0 Accruals 7200
Purchased Part 1250 Accumulated Depreciation 8800
Debtors 107800 Reserves 7725
141375 141375
BALANCE SHEET AS AT END OF WEEK 22
ASSETS LIABILITIES
PROFIT/(LOSS) 8001
NON CASH ITEMS
DEPRECIATION 8000
ACCRUALS
MOVEMENTS
DEBTORS -89400
CREDITORS 23500
INVENTORY
WIP -2000
RM 4000
FG 0
PP -500
CASHFLOW -48399
CASH FLOW STATEMENT FOR WEEKS 2 TO 22
OPENING RAW MATERIAL STOCK 19200 OPENING PP STOCK 750
PURCHASES 100000 PURCHASES 10500
SUB TOTAL 119200 SUB TOTAL 11250
CLOSING RAW MATERIAL STOCK 15200 CLOSING PP STOCK 1250
RAW MATERIAL COG 104000 PP COG 10000
RECONCILIATION OF COST OF GOODS SOLD (COGS)