Question

Bally-B is a small retailer selling carry bags in the CBD. The following estimates are available for the coming period: Month Sales (Units) March 10,000 April 12,000 May 10,000 June 12,000 Inventory policy - ending inventory of finished goods equal to 25% of that month’s sales. Budgeted selling price per bag - $10 Purchase price per bag - $5 [ purchase volume >10,000 bags/month will receive a 5% discount]. Monthly operating expenses are budgeted at: Marketing and advertisements is $10,000 per month. Sales commission of 3% of sales is paid in the month following the sale. Administration cost per month is $9,000. This includes depreciation of $900 per month and insurance of $6,000 per annum, which is paid in June of each year. All expenses and purchases are paid in the month incurred unless otherwise specified. Collections from customers are: 65% in the month of sale 25% one month after the month of sale 10% two months after the month of sale Cash balance as at 28th February is $7,000. Invest surplus to leave a maximum balance of $2,000 and liquidate investments or arrange an overdraft to maintain a minimum balance of $1,000. REQUIRED: Prepare a four month cash budget ending in the month of June.

Answer 1

			Cash budget
						Mar	Apr	May	June
	Beginning cash balance					7000	1000	2000	2000
	Cash receipts		(Note:1)			65000	103000	105000	115000
	Cash available				A	72000	104000	107000	117000
	Cash payments:
		Purchases of bags		(Note:2)		59375	59375	47500	59375
		Marketing and advertisements				10000	10000	10000	10000
		Sales commission		(Note:3)		0	3000	3600	3000
		Administration cost		(Note:4)		7600	7600	7600	7600
		Insurance				0	0	0	6000
	Total cash payments				B	76975	79975	68700	85975
	Preliminary cash balance				C=A-B	-4975	24025	38300	31025
	Liquidate investment to meet $1000					5975
	Investing the surplus to meet $2000						-22025	-36300	-29025
	Ending cash balance					1000	2000	2000	2000
	Note:1
						Mar	Apr	May	June
	Sales (units)					10000	12000	10000	12000
	Budgeted selling price per bag					10	10	10	10
	Budgeted sales					100000	120000	100000	120000
	Collection:
	65% in the month of sale					65000	78000	65000	78000
	25% one month after sale						25000	30000	25000
	10% two month after sale							10000	12000
	Total collections					65000	103000	105000	115000
	Note:2
						Mar	Apr	May	June
	Sales (units)					10000	12000	10000	12000
	Add: Ending inventory			(25% of sales units)		2500	3000	2500	3000
						12500	15000	12500	15000
	Less: Beginning inventory					0*	2500	3000	2500
	Units to be purchased					12500	12500	9500	12500
	Purchase price per bag					5	5	5	5
	Purchase price (gross)					62500	62500	47500	62500
	Less: Discount (purchase volume >10,000 bags at 5%)					3125	3125	0	3125
	Purchase price (net)					59375	59375	47500	59375
	All purchases are paid in the month incurred
	* due to lack of information beginning inventory of march is taken as 0.
	Note:3
						Mar	Apr	May	June
	Budgeted sales					100000	120000	100000	120000
	Sales commission @					3%	3%	3%	3%
	Sales commission					3000	3600	3000	3600
	paid in the month following the sale					0	3000	3600	3000
	Note:4
						Mar	Apr	May	June
	Administration cost					9000	9000	9000	9000
	Less:					900	900	900	900
	Depreciation (being non-cash expenses)
	Insurance	(to be treated seperately-6000/12)				500	500	500	500
						7600	7600	7600	7600