Question

Question 1

Steel Restaurant Supply sells various equipment and supplies to restaurants in the local and surrounding communities. The company’s executive, Mr. Daniel, has requested your help in preparing a cash budget for the month of May and June. Mr. Daniel accumulated the following information for you.

1. The cash balance at May 1 was estimated to be RM120,000.

2. Actual sales of April and budgeted sales for May and June are as follows:

	April	May	June
	Actual	Budgeted
	RM	RM	RM
Cash sales	53,000	58,000	65,000
Credit sales	73,000	90,000	100,000
Total sales	126,000	148,000	165,000

3. Credit sales are collected over a two-month period. With 60% being collected in the first month and the remainder being collected in the second month.

4. Inventory purchased are expected to be 70% of total sales every month. The purchases are fully paid in the month of purchased.

5. Selling and administrative expenses are budgeted to be RM42,000 every month. Of that amount, 20% is depreciation.

6. Equipment costing RM42,000 will be purchased in May for cash.

7. Dividends in the amount of RM40,000 will be paid in the month of June.

8.The company wants to maintain a minimum cash balance of RM50,000 and has set up a line of credit at the local bank that can be used to cover any shortage. If the company must borrow, the loan will be made at the beginning of the month (that not achieve the minimum cash balance) and any repayment will be made on the following month.

Required:

(a) Prepare the Cash Collections Schedule for the month of May and June.

(b) Prepare the Cash Payments Schedule for the month of May and June.

(c) Prepare the Cash Budget for the month of May and June.

(d) Define the term “budget’. How are budget used in planning?

Answer 1

Cash Collections Schedule for the month of May and June.

Particulars	May	June
Cash Sales	58,000	65,000
Credit Sales	29,200 ( 40% from Credit Sales of April Month) 54,000 (60% from current month credit sales	36,000(from Credit Sales of May month) 60,000 (60% from current month credit Sales)
Total Cash Collections	141,200	161,000

Cash Payments

Particulars	May	June
Purchases on Cash (70% of total sales)	103,600	115,500
Selling and Administrative Expenses (Except Depreciation, which is a non-cash item) (42,000 - 8,400)	33,600	33,600
Equipment Purchased	42,000	-
Dividend Paid		40,000
Total Cash payments	179,200	189,100

Cash Budget

Particulars	May	June
Opening Balance	120,000	82,000
Add: Cash Collections	141,200	161,000
Less: Cash Payments	(179,200)	(189,100)
Net Cash Flow	82000	53,900
Closing Balance	82,000	53,900

d) Define the term “budget’. How are budget used in planning?

Budget is an estimation of incomes and expenditure for specific future period. It can be expressed in terms of money, qualntity or both. Budget is created with the aim of realizing of planned objective of a business according to the adopted policy.

Budgets helps in planning in following ways:

• Budgeting provides a definite objective to the organization.
• It helps the department in coordinating their activities,
• It helps management in mobilizing resources at the time when it is necessary.