Question

Romeo Lindo, the management accountant at Woods Household Supplies, is in the process of planning the company’s cash needs for the last quarter of 2016. Extracts from the sales and purchases budgets are as follows:

Month 2016 Cash Sales Sales On Account Purchases On Account

August   $71,000   $520,000 $420,000

September $55,500 $640,000 $400,000

October $38,400 $760,000 $520,000

November $36,500 $680,000   $440,000

December $56,750   $850,000 $540,000

i) An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 4/30, n90: 50% in the month of sale 40% in the first month following the sale 10% in the second month following the sale

ii) Accounts payable are settled as follows, in accordance with the credit terms 5/30, n60: 75% in the month in which the inventory is purchased 25% in the following month

iii) In the month of November, an old motor vehicle, with net book value of $95,000, will be sold for cash to an employee at a gain of $45,000. The employee will be allowed to pay a deposit equal to 50% of the amount in November and the balance will be settled in two equal amounts in December 2016 & January 2017

instrument purchased by Woods Household Supplies with a face value of $500,000 will mature on October 20, 2016. In order to meet the financial obligations of the business, management has decided to liquidate the investment upon maturity.

On that date quarterly interest computed at a rate of 6% per annum is also expected to be collected. Discussion Question _Budgets Page 2

vi) The manager of Woods Household Supplies has negotiated with a tenant for rental of storage space to him beginning October 2016. The rental is $864,000 per annum. The first month’s rent along with one month’s safety deposit will be collected from the tenant on October 1. Thereafter, the monthly rental in expected to be received at the beginning of each month.

vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,016,000 per annum, and are settled monthly. Monthly depreciation expenses of non-current assets of $56,000 are included in these costs.

viii) Other operating expenses are expected to be $168,000 per quarter and are settled monthly.

ix) Wages and salaries are expected to be $2,916,000 per annum and will be paid monthly.

x) At the recently concluded negotiations between management and the union representing the workers it was agreed that Woods Household Supplies should make retroactive payments in the amount of $1,140,000 to employees. The payment is being settled in four equal tranches. The third payment becomes due and payable in October of 2016.

xi) The cash balance on September 30, 2016 is expected to be an overdraft of $175,000. Required:

(a) Prepare a schedule of budgeted cash collections for sales on account for each of the months October to December 2016

(b) Prepare a schedule of expected cash disbursements for purchases on account for the quarter to December 31, 2016.

(c) Prepare a cash budget, with a total column, for the quarter ending December 31, 2016, showing the receipts & payments for each month.

Answer 1

a) Cash collection schedule

Schedule of budgeted cash collection for Oct to Dec 2016
	October	November	December	Quarter
August sales	$52,000			52000
September sales	$2,56,000	$64,000		$3,20,000
October sales				$0
cash sale	$38,400			$38,400
credit sale	$3,64,800	$3,04,000	$76,000	$7,44,800
November sales				$0
cash sale	$36,500			$36,500
credit sale		$3,26,400	$2,72,000	$5,98,400
December sales				$0
cash sale			$56,750	$56,750
credit sale			$4,08,000	$4,08,000
Total cash collections	$7,47,700	$6,94,400	$8,12,750	$22,54,850

b) Cash disbursement schedule

Schedule of expected cash disbursements for Oct to Dec 2016
	October	November	December	Quarter
September purchases	$1,00,000			$1,00,000
October purchases	$3,70,500	$1,30,000		$5,00,500
Novemer purchases		$3,13,500	$1,10,000	$4,23,500
December purchases			$3,84,750	$3,84,750
Total cash disbursements	$4,70,500	$4,43,500	$4,94,750	$14,08,750

c) Cash budget

Cash budget for quarter Oct to Dec 2016
	October	November	December	Quarter
Beginning cash balance	-$1,75,000	$28,867	-$40,567
Cash collections:
cash from sale	$7,47,700	$6,94,400	$8,12,750	$22,54,850
Sale of vehicle		$70,000	$35,000	$1,05,000
Maturity of instrument	$5,00,000			$5,00,000
Interest on instrument	$30,000			$30,000
Rent from tenant	$1,44,000	$72,000	$72,000	$2,88,000
Total cash available	$12,46,700	$8,65,267	$8,79,183	$29,91,150
Less: cash disbursements
Purchases	$4,70,500	$4,43,500	$4,94,750	$14,08,750
Fixed expenses	$1,63,333	$1,63,333	$1,63,333	$4,90,000
Other operating expenses	$56,000	$56,000	$56,000	$1,68,000
Wages and salaries	$2,43,000	$2,43,000	$2,43,000	$7,29,000
Retroactive payment	$2,85,000			$2,85,000
Total cash disbursements	$12,17,833	$9,05,833	$9,57,083	$30,80,750
Ending cash balance	$28,867	-$40,567	-$77,900