Question

You have just been hired as a new accountant by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Because you are well trained in budgeting, you have decided to prepare a budget for the last quarter of the 2020 calendar year in order to show management the benefits that can be gained from an integrated budgeting program. The company sells many styles of earrings, but all are sold for the same price — R90 per pair. Actual sales of earrings for the last three months and budgeted sales for the next three months follow:

Month	Sales in units	Sales in Rands
July (actual)	2 000	R 180 000
August (actual)	2 600	234 000
September (actual)	4 000	360 000
October (budget)	6 500	585 000
November (budget)	10 000	900 000
December (budget)	5 000	450 000

The company does not keep earrings in stock. All sales are on credit. The company has found that only

20% of a month’s sales are collected in the month of sale. An additional 60% is collected in the following month, and 15% is collected in the second month following sale. The remaining 5% is usually written off as irrecoverable in the third month following sale.

Suppliers are paid R36 for a pair of earrings. Eighty percent of a month’s purchases is paid for in the month of purchase; the remaining twenty percent is paid for in the following month. Monthly operating expenses for the company amount to R248 000 and comprise advertising, rent, salaries, utilities, insurance, machine depreciation and bad debts. Cash expenses are paid each month. The company uses a machinery that was acquired at a cost of R1 500 000 two years ago and is being depreciated at 20% per annum on cost using a straight-line method.

The company had a bank balance of R50 000 on 30 September 2020 in line with the minimum monthly cash balance that it retains. All borrowings are done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with the bank that allows the company to borrow in increments of R1 000. The interest rate on these loans is 15% per annum and is payable at the end of the quarter. The company would pay the bank as much of the loan as possible (in increments of R1 000, while still retaining at least R50 000 in cash).

REQUIRED

a) Prepare a monthly cash budget of Earrings Unlimited for each of the three-month period ending 31 December 2020. You do not need to show the total quarter.

Answer 1

Cash Budget

Earrings Unlimited Cash Budget for each of the months October, November, and December
	October	November	December
Beginning cash balance	50,000	50,600	50,800
Plus: Collection from customers (Refer Note 1)	309,600	495,000	672,750
Total cash available (A)	359,600	545,600	723,550
Cash payments:
For Merchandise Purchases (Refer Note 2)	216,000	334,800	216,000
For Operating Expenses (Refer Note 3) (Excluding Depreciation 30,000)	218,000	218,000	218,000
Total cash payments (B)	434,000	552,800	434,000
Preliminary Cash balance	-74,400	-7,200	289,550
Additional loan from bank	125,000	58,000	0
Repayments of loan to bank (including interest)	0	0	-183,000
Payment for Interest on Loan			-6,863
Ending Cash Balance	50,600	50,800	99,688

Note 1 –

Collection from Customers	October	November	December
August Sales 234,000 (15% collected in October)	35,100
September Sales 360,000 (60% collected in October & 15% in November)	216,000	54,000
October Sales 585,000 (10% collected in october; 60% in Nov; 15% in December)	58,500	351,000	87,750
November Sales 900,000 (10% in Nov; 60% in December)	0	90,000	540,000
December Sales 450,000 (10% collected in Dec)			45,000
Budgeted Cash Collection	309,600	495,000	672,750

Note 2 –

Note 2 - Cash payment for purchases
	September	October	November	December
Sales in Units	4,000	6,500	10,000	5,000
Multiply by: Purchase Price per Earring	36	36	36	36
Total Purchases	144,000	234,000	360,000	180,000
Cash Payment Schedule for Purchases
September Purchases (20% in October)		28,800
October purchases (80% in October & 20% in Nov)	187,200	46,800
November purchases (80% in Nov and 20% in Dec)		288,000	72,000
December purchases (80% in Dec)				144,000
Total Cash Payment for Purchases	0	216,000	334,800	216,000

Note 3 –

Cost of Machinery in the question is given R1,500,000 which is not correct. It is assumed that one zero is mentioned extra. So taking Machinery Cost R150,000 and depreciated @ 20% per year on cost using straight line method.

Depreciation Expense is a non cash item so that it is not included in cash expenses.

Depreciation Expense = 150,000 * 20% = 30,000

In case Machine Cost is different, let me know I will updated the cash budget

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you