Question

Q. 1 (Max. Marks:30) John Smith, a college student, plans to sell CD players over the internet & by mail order during the semester to help pay his expenses. He buys the players for $29 & sells them for $50. If payment by cheque accompanies the mail order (estimated to be 40% of sales), he gives 10% discount. If customers include a credit card number for either internet or mail order (estimated 30% of sales), they receive 5% discount. The remaining collections are estimated as follows: One month following 15% Two months following 8% Three months following 5% Uncollectable 2% Sales forecast are as follows: September 150 units October 250 units November 350 units December 450 units January Business terminated John plans to pay his supplier 60% in the month of purchase, and 40% in the following month. A 5% discount is granted on payments made in the month in the month of purchase. However, John will not be able to take any discounts on the September purchases because of cashflow constraints. All September purchases will be paid for in October. John has 50 players on hand (purchased in August and to be paid in September), and plans to maintain enough end-of-month inventory to meet 60% of the next month's sales. John also wished to maintain a closing cash balance of $1,500 in the bank once the business commences in September. The current interest rate on short term loans is 3.5% pa. 3 Required: Prepare schedules for monthly budgeted cash receipts & cash disbursements & the cash budget . During which month will John need to organise a short- term loan & for how much?

Answer 1

		September	October	November	December	January	February	March
	Sales	150	250	350	450	0
	Ending stock	150	210	270	0	0
	Beginning stock	-50	-150	-210	-270
	Purchases	250	310	410	180
	Purchase price	29	29	29	29
	Purchase value	7250	8990	11890	5220
	Selling price	50	50	50	50
	Sales	7500	12500	17500	22500
Solution	(a) schedules for monthly budgeted cash receipts
		September	October	November	December	January	February	March
	Cash collections
	(a) mail orders- 40% sale	3000	5000	7000	9000	0	0	0
	(b) credit card number included in mail-order -30% of sales	2250	3750	5250	6750	0	0	0
	(c ) next month clollection -15% of sales		1125	1875	2625	3375	0	0
	(d) two month following -8% of sale			600	1000	1400	1800
	(e ) three month of following -5% of sale				375	625	875	1125
	(f ) uncollectable - 2% of sales
	Discount allowed on sale
	(a) mail orders- 40% sale -10% discount	-300	-500	-700	-900	0	0	0
	(b) credit card number included in mail-order -30% of sales- 5% discount	-113	-188	-263	-338	0	0	0
	monthly budgeted cash receipts	4838	9188	13763	18513	5400	2675	1125
	(b) cash disbursements
		September	October	November	December	January	February	March
	Payment to supplies
	(a) 60% in the month of purchase		8990	11890	5220	0	0	0
	(b) 40% in the following month		2900	3596	4756	2088	0	0
	(c ) all the September month purchases paid in October		7250
	Discount received on purchases
	(a) 60% in the month of purchase -5% discount	0	-450	-595	-261	0	0	0
	cash disbursements	0	18691	14892	9715	2088	0	0
	Cash balance	1500
	(c )cash budget
		September	October	November	December	January	February	March
	monthly budgeted cash receipts	4838	9188	13763	18513	5400	2675	1125
	cash disbursements	0	18691	14892	9715	2088	0	0
	Cash balance in bank	1500	1500	1500	1500	1500	1500	1500
	Net Cash in hand	3338	-11003	-2629	7298	1812	1175	-375
	Total cash in hand (Cash + Bank)	4838	-9503	-1129	8798	3312	2675	1125
	(d) During which month will John need to organize a short- term loan & for how much?
	John has to organize short term loan in the month of October and November as follows:
	October	9503
	November	1129