Question

Part A

On 1 February 2020 Divine Denim has a cash balance of $40 000. Sales for the next six months are expected to be:

Feb	March	April	May	June	July
$50,000	$70,000	$130,000	$210,000	$260,000	$300,000

The gross margin on sales is expected to be 50%. The company plans to carry a finished goods inventory equal to expected sales for the next two months. Purchases are paid in the month following purchase.

Variable selling expenses are expected to equal 15% of sales. Fixed selling and administrative expenses are expected to be $30 000 per month, including $2,000 depreciation. Eighty percent of the expenses will be paid in the month incurred, the balance in the month following.

Sixty percent of sales are expected to be cash sales. Twenty-five percent of credit sales are collected in the month of sale and 75% in the month following sale.

Required:

1. As an accountant working for Good Numbers you have been asked to prepare a cash budget for the months of March, April, May and June. Comment on the results. (150 words)
2. In light of your findings in i. Good Numbers have been told that the company has arranged to borrow funds whenever necessary in order to maintain a minimum cash balance of $10,000. A line of credit has been arranged with the bank requiring interest of 1% per month on borrowed cash. Interest will be paid at the time the loan is repaid. The loan will be repaid as soon as there is enough cash to do so. Using this information, revise the cash budget.

Answer 1