In: Accounting
MAMMA MIA, INC. |
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Cash Budgeting |
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Mamma Mia, a company selling vintage branded items through a network of retailers in Illinois, has recently implemented a budgeting system |
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Presented below is a month-wise income statement from August throough December 2017. July and August are actual results, while October |
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through December are Plan/Budget numbers |
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Monthly Income Statement |
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Amounts in $'000s |
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ACTUAL |
PLANNED/ BUDGETED |
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Aug-2017 |
Sep-2017 |
Oct-2017 |
Nov-2017 |
Dec-2017 |
Total Q4 |
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Sales |
380 |
390 |
400 |
430 |
480 |
1,310 |
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Cost of goods sold |
260 |
268 |
210 |
220 |
245 |
675 |
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Gross Profit |
120 |
122 |
190 |
210 |
235 |
635 |
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Less: Selling, General and Admin expenses |
- |
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Marketing Expenses |
14 |
15 |
12 |
14 |
12 |
38 |
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Sales Commission |
11 |
12 |
12 |
13 |
14 |
39 |
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Administration expenses |
40 |
42 |
30 |
32 |
38 |
100 |
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65 |
69 |
54 |
59 |
64 |
177 |
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Net Income Before taxes |
55 |
53 |
136 |
151 |
171 |
458 |
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Provision for Income Taxes |
15 |
14 |
37 |
41 |
46 |
124 |
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Net income After Taxes |
40 |
39 |
99 |
110 |
125 |
334 |
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Additional information is provided as follows: |
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Sales numbers are based on the Sales Budget, which includes an assumption that 20% of net sales are to customers who avail of cash discounts of 10% |
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Out of credit sales, it is assumed that 60% is collected in the following month and 38% in the month after that. 2% will be uncollectible. |
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3. All purchases and related costs are from a central distributor, who provides 60-day credit. |
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4. Marketing expenses and selling commissions are paid monthly in arrears |
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5. Assume all Administration expenses are paid in the same month as they are incurred |
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6. Taxes are paid twice annually, in January and July |
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7. Cash balance on Sep 30, 2017 is 700,000 |
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Q1. Prepare a Monthly Cash Budget for the 4th quarter of 2017 |
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Q2. A loan covenant with First Chicago Bank requires that cash balance be at least $1 MM as of Dec 31, 2017. |
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Using just the Plan/Budget data, what is the likelihood that the loan covenant will pose a problem for the Company? |
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b) Examining and considering all available data, how would your answer change? |
Hi
Answer to this is attached in snips.
With given information, company would not meet $ 1Mn cash requirement on Dec 31, 2017.