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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. She has estimated the following sales forecasts for the firm for parts of 2009 and 2010: May 2009 June July August September October November December January 2010

$180,000 180,000 360,000 540,000 720,000 360,000 360,000 90,000 180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labour and raw materials are made the month after these services were provided. Here are the estimated costs of labour plus raw materials: May 2009 June July August September October November December

$ 90,000 90,000 126,000 882,000 306,000 234,000 162,000 90,000

General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2009. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid

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under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain. Question2: The following financial information is available for Lakeview Diner Monthly sales are as follows: $ April 120 000 May 120 000 June 150 000 July (budgeted) 160 000 August (budgeted) 180 000 September (budgeted) 142 000 October (budgeted) 90 000 The sales are 40 percent cash and 60 % credit. Credit sales are collected as follows Month of sales 10% Month after sales 60% Second month after sale 30% a) Interest income of $1 000 is expected in August. Sale of extra equipment will be made in September. The estimated gain on the equipment is expected to be $1 000. The net book value of the equipment is $ 1000. During September, 1000 shares of capital stock with $1 par value are to be sold for $5 per share. Cash is to be received in September for the stock sale. b) Payments for food are made one month after the sale. The food cost percentage is 35%. c) Labour is paid during the month wages are earned and represents 40% of total sales. Fixed expenses, except for insurance, depreciation and property taxes, are $8 000 per month and are paid monthly. d) Insurance premiums of $3 000 are paid in the month of January, April, July and October of each year. The property taxes of $20 000 for the year are paid in two parts of $10 000 each in July and December . Depreciation expense is $3 000 per month. e) The board of directors is expected to pay a dividend of$0.25 per share in, payable in August( 20 000 shares are outstanding. f) In September the firm plans to acquire fixed assets using cash of $20 000. Cash balance at end of June was $27 000

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Required:Prepare a cash budget for the three months period July – August, using the cash receipts payment method. Question 1 The opening cash balance on 1 January was expected to be $30,000. The sales budgeted were as follows: $ November 80,000 December 90,000 January 75,000 February 75,000 March 80,000 Analysis of records shows that debtors settle according to the following pattern: 60% within the month of sale. 25% the month following. 15% the month following. Extracts from the Purchases budget were as follows: $ December 60,000 January 55,000 February 45,000 March 55,000 All purchases are on credit and past experience shows that 90% are settled in the month of purchase and the balance settled the month after. Wages are $15,000 per month and overheads of $20,000 per month (including $5,000 depreciation) are settled monthly. Taxation of $8,000 has to be settled in February and the company will receive settlement of an insurance claim of $25,000 in March. Prepare a cash budget for January, February and March.

Question 2 Motor Spares Ltd supply parts and tools to garages. Goods are sold at cost plus 25%. Budgeted sales Labour costs Expenses $ $ $ August 85,000 5,000 7,500 September 110,000 6,000 8,500 October l80,000 8,500 11,000 November 130,000 8,000 10,500 Goods for resale and expenses are bought on credit and creditors are paid the following month. The expenses include .a monthly depreciation charge of $3,000. Labour is paid monthly. It is company policy to have sufficient stock in .hand at the end of each month to meet sales demand in the next half month. 40% of the sales are for cash and 60% on credit. Cash from credit sales is received the next month. The company is buying a new delivery van in October for $15,000 cash and has to pay tax of $8,500 in September. The opening cash balance at 1st September is $30,000. Required: (a) Profit and Loss accounts for September and October

4 (b) Cash budgets for September and October (c) Reconcile the profit and cash flow for September and October. QUESTION 3 The opening cash balance, on 1st June, is $25,000. Budgeted sales, all on credit, are as follows: $ May 65,000 June 95,000 July 105,000 August 85,000 Analysis of records shows that debtors settle according to the following patterns: 70% in the month of sale 25% the month following (The balance being bad debts i.e. the cash is never received) All purchases are for cash and budgeted purchases are: $ V

June 65,000 July 80,000 August 55,000 Wages are *8,000 per month and overheads are $17,000 per month (including $4,000 depreciation) settled monthly. Tax of $20,500 has to be paid in July and the organization will receive a loan repayment of $12,500 in August. Prepare cash budgets for June, July and August.

Question 4 1What are the typical contents of a cash budget? Why are cash budgets prepared? 2. A company has a cash balance of £27,000 at the beginning of March and you are required to prepare a cash budget for March, April and May having regard to the following information. Creditors give one month’s credit Salaries are paid in the current month Fixed costs are paid one month in arrears and include a charge for depreciation of $5 000 per month. Credit sales are settled as follows: 40% in month of sale, 45% in next month and 12% in the following month. The balance represents bad debts. V

Month Jan Feb March April • May

Cash Sales $

V

20,000 22,000 25,000

Credit Sales $ 74,000 82,000 80,000 90,000 100,000

Purchases $ 55,200 61,200 60,000 69,000 75,000

Salaries $ 9,000 9,000 9,500 9,500 10,000

Fixed Overheads $ 30,000 30,000 30,000 32,000 32,000

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Question 5 The following budgeted Profit and Loss Account has been prepared for Company B for the first six months of the coming year. Jan Feb Mar April May June $ $ $ $ $ $ Sales 22,000 24,000 25,000 29,000 18,000 23,000 Less costs Materials 8,000 9,000 9,500 10,000 6,000 8,500 Labour 3,900 4,000 4,200 4,700 3,700 4,100 Overheads 4,600 4,700 4,900 5,200 3,800 4,500 16,500 17,700 18,600 19,900 13,500 17,100 Profit 5,500 6,300 6,400 9,100 4,500 5,900 The material cost above is arrived at as follows: Opening stock 3,000 Purchases. 10 000 13,000 Closing stock 5,000 8,000

5,000 7,000 12,000 3,000 9,000

3,000 9,000 12,000 2,500 9,500

2,500 11,000 13 500 3,500 10,000

3,500 4,000 7,500 1,500 6,000

1,500 11,000 12,500 4,000 8,500

Notes: (i) All materials are paid for one month after delivery. December purchases $9,000. (ii) Customers are expected to pay two months after sale. Sales for the previous November were $18,000 and for December $19,000. (iii) Labour costs are paid in the month wages are earned. (iv) Included in the overhead figure is $1,000 per month for depreciation all other overhead costs are paid for in the month the cost is incurred. (v) Capital Expenditure is planned for March of $7,500 and June $27,200. (vi) A tax payment is due in January of $8,000. (vii) The expected cash balance at the beginning of January is $2,000. —

Required: i) A cash budget for the first six months of the coming year. ii) Discuss the action the firm should take in view of the cash budget you have prepared.