Question

1. Occipital Wraps Company makes both cash and credit sales. Budgeted sales for the last quarter of the fiscal year are as follows:

	August	September	October
Cash Sales	$40,000	$60,000	$100,000
Credit Sales	300,000	340,000	440,000
Total	$340,000	$400,000	$540,000

Experience reveals that 6% of credit sales will be uncollectible. Of the sales that are collectable 50% are collected in the month of the sale; 35% are collected in the month following the sale, and the remainder are collected in the next following month. (Credit sales were $200,000 in July).

Inventory purchases each month are 100% of the cost of the following month’s projected sales. Occipital’s gross profit rate is 50%, that is a 100% markup on cost. All merchandise purchases are made on credit and paid for in the month following the purchase. Administrative costs are expected to be $150,000 per month.

The cash balance on September 1 is expected to be $20m,000. The minimum cash balance is $10,000.

Required:

-Prepare the cash budget for September and October.

-Why are budgets important for business organizations?

Answer 1

1.)			Amount $
		September	October
	Opening Cash Balance	20,000	23,000
	Add: Collections
	Cash Sales	60,000	100,000
	Collection of July Credit sales ( 200,000 x 9% )	18,000	-
	Collection of August credit sales ( 300,000 x 35% ) , (300,000 x 9% )	105,000	27,000
	Collection of September credit sales ( 340,000 x 50% ) , ( 340,000 x 35% )	170,000	119,000
	Collection of October credit sales ( 440,000 x 50% )	-	220,000
	Total cash Available	373,000	489,000
	Less: Payments
	Payment for merchandise purchase of August ( 400,000 x 50% )	200,000	-
	Payment for merchandise purchase of September (540,000 x 50% )	-	270,000
	Administrative costs	150,000	150,000
	Total Payments	350,000	420,000
	Ending Cash balance	23,000	69,000

2.) The budget play a vital role for any business organization. It the helps the organization in estimating the future requirement for production of goods, purchase of raw materials, collection of sales & disbursement for payments related to purchases & other expense. Further, budget helps in comparison of actual result to find out any variances so that the same can be taken care in future periods.