Question

You are Assistant to Susan Ali, controller for POW PRODUCTS Ltd. (PP), a food distributor. It is late afternoon May 31. Susan has called you to her office to tell you that she is leaving this evening on a well-deserved vacation and that you are to complete and circulate the cash budget for June. To help , she has assembled the following budget data.

	sales	inventory purchase
April	1,200,000
May	1,300,000	940,000
June	1,100,000	1,040,000

Sales. Each month 40% of sales are in cash and 60% are on credit. The collection of credit sales is 20% in the month of sale, 50% in the following month, and 30% in the next month. Inventory purchases. Inventory purchases are paid 30% in the month of purchase, and 70% the following month. Additional information: • At the end of the day on May 31st the company has a cash balance of $460,000. •

Early in May a dealer offered to sell PP a fleet of 12 new high capacity delivery vans at $900,000 for all 12 vans. PP intends to make the purchase in cash on June 15. In addition, the dealer has agreed to accept the old fleet as a trade-in for $140,000. PP will recognize a gain on disposal sale of $55,000 in this transaction.

• Other monthly cash expenses are expected to total $250,000.

• Monthly depreciation of plant and equipment is $180,000.

• Quarterly income tax instalments of $150,000 is to be paid in June.

• A dividend payment of $230,000 was declared in May for payment in June.

• All PP employees share a monthly cash bonus of 2% of the preceding month's sales.

• The company has a policy of maintaining a minimum cash balance of $10o,000 and has a line of credit with the bank to enable it to borrow when necessary. All borrowing is done at the beginning of the month, and borrowings are made to the nearest $1,000. Monthly interest is calculated at 2% per annum and must be paid at the end of each month. There is no outstanding borrowing currently. Susan is rushing to catch her flight as she hands you the budget data, and says, "We may be a bit cash short for June. If so, prepare the budget on the assumption that the cash shortfall will be made up with borrowing. You then go to Stella Ruel, the CEO, to get permission to borrow. However, she will first want to know what are the best alternatives so you should also prepare two reasonable alternatives for your meeting with her. She will also want to know which of these three courses of action you recommend and why. You know our operations, priorities and constraints well enough to do this—just be prepared.”

Required A. Prepare a cash budget for June 200x using a clear and logical format.

B. Assume that Susan is correct about June being cash short. Prepare notes to present to the CEO, outlining the three best alternative courses of action to choose from, i.e., borrowing and two others. Then make a case for the one you judge to be best.

C. Some managers who do not have any accounting training don’t understand the difference between a statement of cash flows (SCF) and a cash budget. The CEO of POW PRODUCTS , Stella Ruel, is one of these non-accountant managers and she asks you to explain, briefly, in what way are these two statements are similar and in what way to they differ. In particular, what are the key differences between them.

Answer 1

	POW Products
	Cash Receipts
	Month	April	May	June
	Sales	$       1,200,000	$       1,300,000	$       1,100,000
1	Cash from 40% Cash Sales	$          480,000	$          520,000	$          440,000
2	Credit sale amount (60%)	$          720,000	$          780,000	$          660,000
	Credit sale collection=20% same month , 50% month 1 and 30% month 2
	Cash Collection from April credit sale	$          144,000	$          360,000	$          216,000
	Cash Collection from May credit sale		$          156,000	$          390,000
	Cash Collection from June credit sale			$          132,000
3	Total cash collection from credit sales	$          144,000	$          516,000	$          738,000
	Total Cash flow from sales =1+3	$          624,000	$       1,036,000	$       1,178,000
	Cash to be disbursed for purchase
	Net Purchase		$          940,000	$       1,040,000
	Payment 30% in same month and 70% in month 1
	Cash payment for May purchase		$      282,000.0	$      658,000.0
	Cash payment for June purchase			$      312,000.0
	Total cash payment		$      282,000.0	$      970,000.0

	Cash Budget June
	Details	Amt $
	Cash flow from Sales	$       1,178,000
1	Total Cash in	$       1,178,000
	Cash Out
	Cash payment from purchase	$          970,000
	Cash paymnet for new Van (net of old van trade off)	$          760,000
	Other Monthly cash exp	$          250,000
	Quarterly Income Tax payment	$          150,000
	Dividend payout	$          230,000
	Cash bonus on 2% of sales	$            22,000
2	Total Cash out	$       2,382,000
3	Cash surplus(+)/shortfall(-) at month end=1-2	$     (1,204,000)

	As there is a requirement to have a min $100000 cash balance
	, PP needs to borrow $1400000 in June beginning

B	So the options to manage the cas budget are
	1. To borrow $1.4 M in the beginning of June
	2. Otherwise there may be another option postpone the
	delivery of the van or make an arrangement for paying
	for the delivery vans in next month so that PP
	can manage with $500000 of borrowing in June.
	3.. Third option may be to look for options for getting 50% of
	the credit sales by June end itself so that it can get additional
	$33000 in June and may manage with $1M borrowing in June
	Scenario 2 is the best option as it will minimize the
	interest expense and getting a paymnet term negotiation
	with Van supplier may be easier to execute.