Question

            Kiko Ltd is a family owned Asian grocery business that specialises in selling a variety of Japanese products. The company has recently started to receive orders from hotels across the state. It is now 1 October, and Mr Seike, the owner, is very pleased with his growing business. He compiled data on the business’ revenue and purchases for the past three months, and prepared forecasts for the upcoming three months as shown below:

	Sales Revenue	Purchases
Actual data:
July	$35,000	$22,000
August	$68,000	$40,000
September	$27,000	$16,000
Forecasted data:
October	$55,000	$29,000
November	$46,000	$25,000
December	$50,000	$27,000

The cash balance on 1 October is $95,000; 
The following information is also pertinent to Kiko’s cash movements:

          20% of all sales per month are for cash, 70% of all credit sales are collected within the month of sale, 
20% of credit sales are collected in the month following the sale, 7% of credit sales are collected two 
months after the sale, and the remaining 3% is deemed uncollectible; 


          70% of the amount for goods purchased is paid in the month of purchase, with the remaining 30% is 
paid in the following month; 


          Wages total $12,000 each month and are paid in the month they are incurred; 


          Budgeted operating expenses total $22,000 per month, and includes depreciation ($14,000) and rent 
($2,500). Rent was prepaid in June for 6 months (up to and including December); and 


          $1,200 in interest payments are made on October 17th. 


Based on the above information, prepare the following for Kiko Ltd: 


(a) A schedule of cash receipts for October from sales.

(b) A cash budget for October.

(c) Recommend three options for improving the speed of cash collections from sales to improve the cash position.

Answer 1

(A) Cash receipts for October from Sales
Pattern of receipt
20% of all sales per month are for cash
So, Sales of October - $ 55,000*20%	11,000
70% of all credit sales are collected within the month of sale
October credit sales = $ 55,000*80% = 44,000
So, $ 44,000*70% to be received in October	30,800
20% of credit sales are collected in the month following the sale
So, 20% of credit sales of September would be recieived in October
Credit sales of Sep.= 27,000*80%= 21,600
So, 20% of credit sales of September ($ 21600) would be recieived in October	4,320
7% of credit sales are collected two months after the sale
So, 20% of credit sales of July would be recieived in October
Credit sales of July.=35000*80%= 28,000
So, 7% of credit sales of July ($ 28000) would be recieived in October	1,960
Cash receipt for October from Sales	48,080
(B) A cash budget for October.
Note 1 - Cash receipt for October from Sales	48,080
Note 2 -Cash payments in October of purchase
70% of the amount for goods purchased is paid in the month of purchase
So, 70% of October purchase (29000) to be paid in cash in october	20,300
remaining 30% is paid in the following month;
So, 30% of purchase of september would be paid in october
30% of $ 16,000	4,800
Cash payments in October of purchase	25,100
`Budgeted opearting expense	22,000
less- Non cash expenses for October
" Depreciation	(14,000)
" Prepaid Rent	(2,500)
Note 3 -Budgeted opearting expense in Cash	5,500
Note 4 - interest payment for October	1,200
Summary of Cash Budget
Opening Balance as on October 1	95,000
Cash receipt for October from Sales (Note 1)	48,080
Cash payments in October of purchase (Note 2)	(25,100)
Budgeted opearting expense in Cash (Note 3)	(5,500)
interest payment for October (Note 4)	(1,200)
wages	(12,000)
Closing Balance as on October 31	99,280

Recommondation - 7% of total credit sales should be received one month after the sale, not after two month after the sale