Question

Mona Company is a merchandising company that sells a single product. The company's inventories, production, and sales in units for the next three months have been forecasted as follows:

	October	November	December
Beginning inventory	10,000	10,000	10,000
Merchandise purchases	60,000	70,000	35,000
Sales	60,000	70,000	40,000
Ending inventory	10,000	10,000	5,000

Units are sold for $12 each. One fourth of all sales are paid for in the month of sale and the balance are paid for in the following month. Accounts receivable at September 30 totaled $450,000.

Merchandise is purchased for $7 per unit. Half of the purchases are paid for in the month of the purchase and the remainder are paid for in the month following purchase.

Selling and administrative expenses are expected to total $120,000 each month. One half of these expenses will be paid in the month in which they are incurred and the balance will be paid in the following month.

There is no depreciation.

Accounts payable at September 30 totaled $290,000.
Cash at September 30 totaled $80,000.

A payment of $300,000 for purchase of equipment is scheduled for November, and a dividend of $200,000 is to be paid in December.

Required:

a. Prepare a schedule of expected cash collections for each of the months of October, November, and December.
b. Prepare a schedule showing expected cash disbursements for merchandise purchases and selling and administrative expenses for each of the months October, November, and December.
c. Prepare a cash budget for each of the months October, November, and December. There is no minimum required ending cash balance.

Answer 1

Solution:

Part a –

Schedule of Expected Cash Collections
	October	November	December
Beginning Accounts Receivable September 30 (Collection in October)	$450,000
October Sales (1/4 collection in October and 3/4 in November)	$180,000	$540,000
November Sales (1/4 collection in November and 3/4 in Dec)		$210,000	$630,000
December Sales   (1/4 Collection in December)			$120,000
Expected Cash Collections	$630,000	$750,000	$750,000

Note 1 – Calculation of Sales Revenue

	October	November	December
Expected Sales Unit	60000	70000	40000
Unit Sale Price	$12	$12	$12
Budgeted Sales Revenue	$720,000	$840,000	$480,000

Part b –

Schedule of expected cash disbursements for merchandise purchases and selling and administrative expenses

Schedule of Expected Cash Disbursements
	October	November	December
Expected Cash Disbursements for Merchandise Purchases
September Accounts Payable (paid in October)	$290,000
October purchases (1/2 paid in October and 1/2 in November)	$210,000	$210,000
November Purchases (1/2 paid in Nov and 1/2 in December)		$245,000	$245,000
December Purchases (1/2 paid in Dec)			$122,500
Total Expected Cash Disbursements for Merchandise Purchases	$500,000	$455,000	$367,500
Selling and Administrative Expenses (Monthly $120,000 – ½ paid in the month incurred and ½ paid in next month)	$60,000	$120,000	$120,000
Total Expected Cash Disbursements	$560,000	$575,000	$487,500

Part c – Cash Budget

MONA COMPANY Cash Budget for each of the months October, November, and December
	October	November	December
Beginning cash balance	$80,000	$150,000	$25,000
Plus: Collection from customers (Refer Part a)	$630,000	$750,000	$750,000
Total cash available (A)	$710,000	$900,000	$775,000
Cash payments:
For Merchandise Purchases (Refer part b)	$500,000	$455,000	$367,500
For Selling and administrative expenses (refer part b)	$60,000	$120,000	$120,000
Purchase of Equipment	$0	$300,000	$0
Dividend paid	$0	$0	$200,000
Total cash payments (B)	$560,000	$875,000	$687,500
Ending Cash Balance (A - B)	$150,000	$25,000	$87,500

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you