The management accountant at Hewitt Manufacturing Company, Conrad Fuller, is in the process of preparing the cash budget for the business for the quarter ending December 31, 2010. Extracts from the sales and purchases budgets are as follows: Month Cash Sales Sales on Account Purchases on Account August September October November December $45,000 $60,000 $38,000 $47,000 $51,000 $480,000 $600,000 $720,000 $640,000 $800,000 $400,000 $380,000 $480,000 $500,000 $600,000 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 10/30, n90: 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale ii) Accounts payable are settled as follows: 70% in the month in which the inventory is purchased 30% in the following month The credit terms of the suppliers is 5/30, n60. iii) A motor vehicle costing $350,000 will be purchased and paid for in November 2010. iv) During December, the management of Hewitt Manufacturing Company expects to sell equipment that cost $450,000 at a gain of $60,000. Accumulated depreciation on this equipment is $380,000. v) A money market instrument purchased by the company with a face value of $300,000 will mature on October 1, 2010. On that date quarterly interest computed at a rate of 15% per annum will also be collected. vi) On the advice of their financial management team, Hewitt Company has decided to raise additional capital for the business by issuing additional shares in December 2010. Proceeds from the issue of these shares are expected to amount to $850,000. vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,800,000 per annum, [including depreciation on property, plant & equipment of $40,000 per month] and are settled monthly. viii) Commission and other selling expenses are expected to be $144,000 per quarter and are settled in the month incurred. ix) Wages and salaries are expected to be $2,880,000 per annum and will be paid monthly. Continued.......................... © The University of the West Indies Course Code MS 15B 7 x) The company is expected to pay rent and property taxes of $50,000 each month. xi) The cash balance on September 30, 2010 is expected to be an overdraft of $45,000 Required: (a) Prepare schedules of budgeted cash collections from customers and budgeted cash payments for inventory purchases, for each of the months October to December. (b) Prepare a cash budget, with a total column, for the quarter ending December 31, 2010, showing the expected cash receipts and payments for each month, and the ending cash balance before financing for each month. (c) All companies in the industry in which Hewitt Manufacturing operates are required to maintain a minimum cash balance of $50,000 each month. Suggest two (2) possible steps that may be taken to satisfy this requirement, other than by way of borrowing.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The
preparing the
sales and purchases budgets are as follows:
Month Cash
Sales
Sales
on
Account
Purchases
on
Account
August
September
October
November
December
$45,000
$60,000
$38,000
$47,000
$51,000
$480,000
$600,000
$720,000
$640,000
$800,000
$400,000
$380,000
$480,000
$500,000
$600,000
i) An analysis of the records shows that trade receivables (
to the following credit pattern, in accordance with the credit terms 10/30, n90:
50% in the month of sale
30% in the first month following the sale
20% in the second month following the sale
ii) Accounts payable are settled as follows:
70% in the month in which the inventory is purchased
30% in the following month
The credit terms of the suppliers is 5/30, n60.
iii) A motor vehicle costing $350,000 will be purchased and paid for in November 2010.
iv) During December, the management of Hewitt Manufacturing Company expects to sell equipment
that cost $450,000 at a gain of $60,000. Accumulated
v) A
on October 1, 2010. On that date quarterly interest computed at a rate of 15% per annum will also
be collected.
vi) On the advice of their
additional capital for the business by issuing additional shares in December 2010. Proceeds from
the issue of these shares are expected to amount to $850,000.
vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,800,000
per annum, [including depreciation on property, plant & equipment of $40,000 per month] and are
settled monthly.
viii) Commission and other selling expenses are expected to be $144,000 per quarter and are settled in
the month incurred.
ix) Wages and salaries are expected to be $2,880,000 per annum and will be paid monthly.
Continued..........................
© The University of the West Indies Course Code MS 15B
7
x) The company is expected to pay rent and property taxes of $50,000 each month.
xi) The cash balance on September 30, 2010 is expected to be an overdraft of $45,000
Required:
(a) Prepare schedules of budgeted cash collections from customers and budgeted cash payments for
inventory purchases, for each of the months October to December.
(b) Prepare a cash budget, with a total column, for the quarter ending December 31, 2010, showing
the expected cash receipts and payments for each month, and the ending cash balance before
financing for each month.
(c) All companies in the industry in which Hewitt Manufacturing operates are required to maintain a
minimum cash balance of $50,000 each month. Suggest two (2) possible steps that may be taken
to satisfy this requirement, other than by way of borrowing.
(d) If Hewitt eliminates any cash deficiency by borrowing in $5,000 notes from National Bank, how
much will the company need to borrow to cover October’s shortfall?
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