In: Accounting
3. CDE Ltd has provided the following budgeted Income Statement extract for the July-September quarter in 2020.
July
August September
$,000
$’000
$’000
Sales (all on credit)
85
88
91
Purchases
(43)
(45)
(47)
Depreciation expense
(5)
(5)
(5)
Electricity expense
(6)
(6)
(6)
Other expenses
(25)
(25)
(25)
You are also given the following additional information:
Given information
All sales are collected in cash the month after sale.
All purchases are made on credit and paid for in cash the month after purchase.
Electricity is paid at the end of each quarter (i.e. on 30 September).
Other expenses are paid in cash in the same month they are incurred.
The business plans to buy a delivery van in August for $40,000 cash.
Data for preparing cash budget:
July | August | September | |
a. Sales | $85,000 | $88,000 | $91,000 |
b. Collections from customers | $85,000 | $88,000 | |
c. Purchases | $43,000 | $45,000 | $47,000 |
d. Payment for purchases | $43,000 | $45,000 | |
e. Electricity expense | $6,000 | $6,000 | $6,000 |
f. Payment for electricity expense | $18,000 | ||
g. Payments for other expenses | $25,000 | $25,000 | $25,000 |
h. Total payments (d+f+g) | $68,000 | $88,000 |
a. Statement showing the cash budget for CDE Ltd for the month of August and September:
August | September | |
a. Opening Cash balance | $17,000 | $34,000 |
b. Collections from customers | $85,000 | $88,000 |
c. Total Cash Available (a+b) | $102,000 | $122,000 |
d. Cash disbursements | $68,000 | $88,000 |
e. Ending Cash balance (c-d) | $34,000 | $34,000 |
b. Assessment of the cash position of CDE Ltd:
The business plans to buy a delivery van in August for $40,000 cash, but the company does not have the enough cash balance at the end of the August to pay for the purchase it needs to obtain a loan from the local bank to finance the funds. The shortfall of amount is $6,000 ($40,000 - $34,000).
c. Alternatives available is:
1. The company can raise the funds by issue of common stock.
2. Rising of bank loan
3. By issuing the long term debt (note).