Question

QUESTION 2

Classique Household Furnishings & Appliances is a family-owned furniture store. You are the management accountant of the concern and have been given the task of preparing the cash budget for the business for the quarter ending September 30, 2018. Your data collection has yielded the following:

i)          Extracts from the sales and purchases budgets are as follows:

Month	Cash Sales	Sales On Account	Purchases On Account
May	$50,000	$480,000	$390,000
June	$65,000	$600,000	$360,000
July	$43,400	$720,000	$450,000
August	$52,800	$640,000	$400,000
September	$56,750	$800,000	$500,000

ii)            An analysis of the records shows that trade receivables (accounts receivable) for sales on account are settled according to the following credit pattern, in accordance with the credit terms 5/30, n90:

50% in the month of sale

35% in the first month following the sale

15% in the second month following the sale

iii)           Accounts payable are settled as follows, in accordance with the credit terms – 4/30, n60:

70% in the month in which the inventory is purchased

30% in the following month

iv)           Monthly rental is received from a tenant for storage space rented to him by Classique Household Furnishings & Appliances. The rental is $840,000 per annum and is received quarterly in advance. Rental relating to the quarter under review becomes due on July 1.

v)            Computer equipment, which is estimated to cost $350,000, will be acquired for cash in August. The manager has made arrangements with the seller to make a cash deposit of 50% of the amount upon signing of the agreement in August, with the balance to be settled in four equal monthly instalments, starting in September 2018.

vi)           An investment instrument purchased by the company with a face value of $480,000 will mature on July 20, 2018 and will be liquidated on that date. At the same time, quarterly interest computed at a rate of 8⅓ % per annum will also be collected.

vii)         Fixed operating expenses, which accrue evenly throughout the year, are estimated to be $1,920,000 per annum [including depreciation on non-current assets of $42,000 per month] and are settled monthly.

viii)        Wages and salaries are expected to be $2,304,000 per annum and will be paid monthly.

ix)           Other operating expenses are expected to be $144,000 per quarter and are settled monthly.

x)            In the month of August, furniture & fixtures, which cost $455,000, will be sold to an employee at a loss of $20,000. Accumulated depreciation on the furniture & fixtures at that time is expected to be $305,000. The employee will be allowed to pay a deposit equal to 60% of the selling price in August with the balance settled in two equal amounts in September & October.

xi)           As part of its investing activities, the management of Classique Household Furnishings & Appliances is in the process of completing a major addition to the business property which is estimated to cost $1,200,000, and which is being funded by external borrowing. $460,000 of the principal, along with interest of $18,000 is due to be paid on July 15, 2018.

xii)         The cash balance on September 30, 2018 is expected to be an overdraft of $264,000.

Required:

(a)          The business needs to have a sense of its future cashflows and therefore requires the preparation of the following:

• A schedule of budgeted cash collections for trade receivables for each of the months July to September.                                                                                                            
• A schedule of expected cash disbursements for accounts payable for each of the months July to September.                                                                                                     

• A cash budget, with a total column, for the quarter ending September 30, 2018, showing the expected cash receipts and payments for each month and the ending cash balance for each of the months, given that no financing activity took place.                                      (25½ marks)

(b)          Upon receipt of the budget the team manager has now informed you that all companies in the industry in which Classique Household Furnishings operates are required to maintain a minimum cash balance of $140,000 each month. Based on the budget prepared, will the business be meeting this requirement? The business is already heavily indebted, so management does not wish to borrow any additional funds from outside sources. Suggest four (4) internal strategies that the business may employ in order to improve the organization’s monthly cash flow. Each strategy must be fully explained.    

Answer 1

The cash collection for trade receivables have been computed by calculating 50% realization in the first month, i.e. the month in which sales took place, 35% in the second month, i.e. the month next to the month in which sales took place and balance 15 % in the third month.

The expected cash disbursement to accounts payable have been computed by calculating 70% disbursement in the month in which purchase took place and balance 30% in the subsequesnt month, i.e. the month next to the month in which purchases were made.

Total rental is $840,000 per annum and is paid quarterly in advance, hence, per quarter advance rent is $840,000/4 = $210,000

Payment against computer equipment to be maid 50% in the month of August, so, 50% of $350,000 = $175,000

Balance 50%, i.e., $175,000 to be paid in two equal monthly installments from September, so, payment in Septemebr = $175,000/2 = $43,750

Maturity proceeds of investment instrument = principle value + interest proceeds

= $ 480,000 + compunded quaterly interest for four quarters @ 8.33% p.a. compunded quaterly

= $ 480,000 + $41,250 = $ 521,250

Fixed annual operating expenses = $ 1,920,000

Monthly fixed operating expense = $ 1,920,000 / 12 = $ 160,000

Depreciation = $ 42,000 monthly

Hence, fixed monthly operationg expenses in cash = $ 160,000 - $ 42,000 = $ 1118,000

Wages and salaries annual - $ 2,304,000

Hence, wages and salaries monthly = $ 2,304,000 / 12 = $ 192,000

Other operating expenses quarterly = $ 144,000

Monthly other operating expenses = $ 144,000 / 3 = $ 48,000

Cost of furniture & fixture = $ 455,000

Accumulated depreciation till date = $ 305,000

Depreciated value of furniture & fixture today = $ 455,000 - $ 305,000 = $ 150,000

Sold at a loss of = $ 20,000

Hence, selling price = $ 150,000 - $ 20,000 = $ 130,000

Received 60% in August = $ 130,000 X 60% = $ 78,000

Balance recived in two equal installments in September & October, Hence, received in September = ($ 130,000 X 40%) / 2 = $ 26,000

Since, financing activity does not take place, hence, no cash flow on account of investment opportunity.

The average monthly closing cash balance has been calculated by adding closing balance for each of the five months and then dividing the same by 5.