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Portmore Community College Management Accounting (ACCT3603) Cash Budgeting Question 1 Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. he has estimated the following sales forecasts for the firm firm for parts of !""# and !"1"$
%a& !""# )une )ul& ugust eptember 0ctober o2ember December )anuar& !"1"
'1(",""" 1(",""" *+",""" -",""" /!",""" *+",""" *+",""" #",""" 1(","""
3stimates regarding pa&ments obtained from the credit department are as follows$ collected within the month of sale, 1"45 collected the month following the sale, /-45 collected the second month following the sale, 1-4. 6a&ments 6 a&ments for labour and raw materials are made the month after these ser2ices were pro2ided. Here are the estimated costs of labour plus raw materials$ %a& !""# )une )ul& ugust eptember 0ctober o2ember December
' #",""" #",""" 1!+,""" ((!,""" *"+,""" !*,""" 1+!,""" #","""
7eneral and administrati2e salaries are appro8imatel& '!/,""" a month. 9ease pa&ments under long:term leases are '#,""" a month. Depreciation charges are '*+,""" a month. %iscellaneous e8penses are '!,/"" a month. ;ncome ta8 pa&ments of '+*,""" are due in eptember and December. progress pa&ment of '1(",""" on a new design studio must be paid in 0ctober.
that is, cash receipts come in at the rate of 1?*" each da&@, but all outflows must be paid on the -th. Aill Aill this affect the cash budget Chat is, will the cash budget b udget &ou prepared be 2alid
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under these assumptions ;f not, what could be done to make a 2alid estimate of the peak financing requirements o calculations are required, although if &ou prefer, &ou can use calculations to illustrate the effects. Bowers’ sales are seasonal5 and her compan& produces on a seasonal basis, ust ahead of sales. Aithout making an& calculations, discuss how the compan&’s current and debt ratios would 2ar& during the &ear if all financial requirements were met with short:term bank loans.
Che following financial information is a2ailable for 9ake2iew Diner %onthl& sales are as follows$ ' pril 1!" """ %a& 1!" """ )une 1-" """ )ul& >budgeted@ 1+" """ ugust>budgeted@ 1(" """ eptember >budgeted@ 1! """ 0ctober >budgeted@ #" """ Che sales are " percent cash and +" 4 credit. !" """ shares are outstanding. f@ ;n eptember the firm plans to acquire fi8ed assets using cash of '!" """.
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e!uired: 6repare a cash budget for the three months period )ul& E ugust, using the cash receipts pa&ment method. Question 1 Che opening cash balance on 1 )anuar& was e8pected to be '*",""". Che sales budgeted were as follows$ ' o2ember (",""" December #",""" )anuar& /-,""" Februar& /-,""" %arch (",""" nal&sis of records shows that debtors settle according to the following pattern$ +"4 within the month of sale. !-4 the month following. 1-4 the month following. 38tracts from the 6urchases budget were as follows$ ' December +",""" )anuar& --,""" Februar& -,""" %arch --,""" ll purchases are on credit and past e8perience shows that #"4 are settled in the month of purchase and the balance settled the month after. Aages are '1-,""" per month and o2erheads of '!",""" per month >including '-,""" depreciation@ are settled monthl&. Ca8ation of '(,""" has to be settled in Februar& and the compan& will recei2e settlement of an insurance claim of '!-,""" in %arch. Pre"are a cash budget for )anuar&, Februar& and %arch.
Question 2 %otor pares 9td suppl& parts and tools to garages. 7oods are sold at cost plus !-4. Budgeted sales #a$our costs %&"enses ' ' ' ugust (-,""" -,""" /,-"" eptember 11",""" +,""" (,-"" 0ctober l(",""" (,-"" 11,""" o2ember 1*",""" (,""" 1",-""
7oods for resale and e8penses are bought on credit and creditors are paid the following month. Che e8penses include .a monthl& depreciation charge of '*,""". 9abour is paid monthl&. ;t is compan& polic& to ha2e sufficient stock in .hand at the end of each month to meet sales demand in the ne8t half month. "4 of the sales are for cash and +"4 on credit. a@ 6rofit and 9oss accounts for eptember and 0ctober
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>b@ c@ econcile the profit and cash flow for eptember and 0ctober. Q%T*+, 3
Che opening cash balance, on 1st )une, is '!-,""". Budgeted sales, all on credit, are as follows$ ' %a& +-,""" )une #-,""" )ul& 1"-,""" ugust (-,""" nal&sis of records shows that debtors settle according to the following patterns$ /"4 in the month of sale !-4 the month following >Che balance being bad debts i.e. the cash is ne2er recei2ed@ ll purchases are for cash and budgeted purchases are$ ' -
)une +-,""" )ul& (",""" ugust --,""" Aages are G(,""" per month and o2erheads are '1/,""" per month >including ',""" depreciation@ settled monthl&. Ca8 of '!",-"" has to be paid in )ul& and the organiation will recei2e a loan repa&ment of '1!,-"" in ugust. Pre"are cash budgets for )une, )ul& and August'
Question . 1Ahat are the t&pical contents of a cash budget Ah& are cash budgets prepared !. compan& has a cash balance of I!/,""" at the beginning of %arch and you are re!uired to "re"are a cash budget for %arch, pril and %a& ha2ing regard to the following information.
%onth )an Feb %arch pril J %a&
-
!",""" !!,""" !-,"""
6urchases ' --,!"" +1,!"" +",""" +#,""" /-,"""
alaries ' #,""" #,""" #,-"" #,-"" 1","""
Fi8ed 02erheads ' *",""" *",""" *",""" *!,""" *!,"""
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Question /
Che following budgeted 6rofit and 9oss ccount has been prepared for i@ ll materials are paid for one month after deli2er&. December purchases '#,""". >ii@ iii@ 9abour costs are paid in the month wages are earned. >i2@ ;ncluded in the o2erhead figure is '1,""" per month for depreciation all other o2erhead costs are paid for in the month the cost is incurred. >2@ 2i@ ta8 pa&ment is due in )anuar& of '(,""". >2ii@ Che e8pected cash balance at the beginning of )anuar& is '!,""". Required: i@ cash budget for the first si8 months of the coming &ear. ii@ Discuss the action the firm should take in 2iew of the cash budget &ou ha2e prepared. =
