Question

Value Products Ltd manufactures a single product. You are the management accountant
responsible for preparing the quarterly budgets of the next quarter from July to September 2020.
Your colleague, the financial accountant, has provided you the following extracted data from
the balance sheet as at 30 June 2020:
Assets Liabilities
Accounts Receivable $250,000 Bank Overdraft $90,000
Plant and Machinery $800,000 (Cost) Dividend Payable $10,000
Long-term Loan 15% $400,000
The following transactions are expected during the next three months:
Sales Purchases Expenses
January $1,500,000 $1,000,000 $200,000
February 2,000,000 1,500,000 250,000
March 3,000,000 2,800,000 300,000
All sales are on credit and the collections have the following pattern:
During the month of sale: 80% (early payment discount of 4% is given)
In the subsequent month: 20% (no discount)
Payments for purchase are made in the month of purchase enjoying a 10% early payment
discount.
Expenses shown above include depreciation of machinery which is calculated at a rate of 12%
per annum on cost. Expenses are paid for in the month in which they are incurred.
The dividend payable will be paid in July.
Loan interest for the three months will be paid in September.
Required:
(a) Prepare a Cash Budget for each of the three months from July to September 2020.

(b) Prepare a Budgeted Income Statement for the period from July to September 2020.

Answer 1