The management accountant at L & P Merchandising & More, Michael Stona, is in theprocess of preparing the cash budget for the business for the quarter ending December31, 2020. Extracts from the sales and purchases budgets are as follows:Month2020CashSalesSalesOnAccountPurchasesOnAccountAugust $121,000 $480,000 $390,000September $95,500 $600,000 $360,000October $132,680 $720,000 $480,000November $105,900 $650,000 $400,000December $216,000 $800,000 $500,000(i) An analysis of the records shows that trade receivables (accounts receivable) aresettled according to the following credit pattern, in accordance with the creditterms 5/30, n90:60% in the month of sale30% in the first month following the sale10% in the second month following the sale(ii) Accounts payable are settled as follows, in accordance with the credit terms 3/30,n60:80% in the month in which the inventory is purchased20% in the following month(iii) During November, the management of L & P Merchandising expects to sell an oldmotor vehicle that cost $650,000 at a gain of $25,000. Accumulated depreciationon this motor vehicle at that time is expected to be $475,000. The employee willbe allowed to pay a deposit equal to 40% of the selling price in November and thebalance settled in four equal amounts from December 2020 to March of 2021.(iv) Computer Equipment, which is estimated to cost $480,000, will be purchased inDecember. The manager has made arrangements with the seller to make a cashdeposit of 50% of the amount upon signing of the agreement in December, withthe balance to be settled in four equal monthly instalments, starting in January2021.(v) A long-term instrument purchased by L & P Merchandising with a face value of$480,000 will mature on October 20, 2020. In order to meet the financialobligations of the business, management has decided to liquidate the investmentupon maturity. On that date quarterly interest computed at a rate of 4½% perannum is also expected to be collected.Page 2(vi) Fixed operating expenses which accrue evenly throughout the year, are estimatedto be $2,040,000 per annum, [including depreciation on non-current assets of$35,000 per month] and are settled monthly.(vii) Other operating expenses are expected to be $174,000 per quarter and are settledmonthly.(viii) The management of L & P Merchandising has negotiated with a tenant to rentoffice space to her beginning November 1. The rental is $540,000 per annum. Thefirst month’s rent along with one month’s safety deposit is expected to be collectedon November 1. Thereafter, monthly rental income becomes due at the beginningof each month.(ix) Wages and salaries are expected to be $2,940,000 per annum and will be paidmonthly.(x) At the recently concluded negotiations between management and the unionrepresenting the workers it was agreed that L & P Merchandising should makeretroactive payments in the amount of $1,520,000 to employees. The payment isbeing settled in four equal tranches. The third payment becomes due and payablein October of 2020.(xi) The cash balance on September 30, 2020 is expected to be an overdraft of$138,000Required:(a) Prepare a schedule of budgeted cash collections for sales on account for each ofthe months October to December, 2020.(b) Prepare a schedule of expected cash disbursements for purchases on account forthe quarter to December 31, 2020.(c) Prepare a cash budget, with a total column, for the quarter ending December 31,2020, showing the receipts and payments for each month.(d) All businesses in the industry in which L & P Merchandising operates are requiredto maintain a minimum cash balance of $125,000 each month. Based on thebudget prepared, will the business be meeting this requirement? Suggest three (3)possible steps (other than borrowing), that may be taken by the management of
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
process of preparing the
31, 2020. Extracts from the sales and purchases budgets are as follows:
Month
2020
Cash
Sales
Sales
On
Account
Purchases
On
Account
August $121,000 $480,000 $390,000
September $95,500 $600,000 $360,000
October $132,680 $720,000 $480,000
November $105,900 $650,000 $400,000
December $216,000 $800,000 $500,000
(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 5/30, n90:
60% in the month of sale
30% 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 3/30,
n60:
80% in the month in which the inventory is purchased
20% in the following month
(iii) During November, the management of L & P Merchandising expects to sell an old
motor vehicle that cost $650,000 at a gain of $25,000. Accumulated
on this motor vehicle at that time is expected to be $475,000. The employee will
be allowed to pay a deposit equal to 40% of the selling price in November and the
balance settled in four equal amounts from December 2020 to March of 2021.
(iv) Computer Equipment, which is estimated to cost $480,000, will be purchased in
December. The manager has made arrangements with the seller to make a cash
deposit of 50% of the amount upon signing of the agreement in December, with
the balance to be settled in four equal monthly instalments, starting in January
2021.
(v) A long-term instrument purchased by L & P Merchandising with a face value of
$480,000 will mature on October 20, 2020. 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 4½% per
annum is also expected to be collected.
Page 2
(vi) Fixed operating expenses which accrue evenly throughout the year, are estimated
to be $2,040,000 per annum, [including depreciation on non-current assets of
$35,000 per month] and are settled monthly.
(vii) Other operating expenses are expected to be $174,000 per quarter and are settled
monthly.
(viii) The management of L & P Merchandising has negotiated with a tenant to rent
office space to her beginning November 1. The rental is $540,000 per annum. The
first month’s rent along with one month’s safety deposit is expected to be collected
on November 1. Thereafter, monthly rental income becomes due at the beginning
of each month.
(ix) Wages and salaries are expected to be $2,940,000 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 L & P Merchandising should make
retroactive payments in the amount of $1,520,000 to employees. The payment is
being settled in four equal tranches. The third payment becomes due and payable
in October of 2020.
(xi) The cash balance on September 30, 2020 is expected to be an overdraft of
$138,000
Required:
(a) Prepare a schedule of budgeted cash collections for sales on account for each of
the months October to December, 2020.
(b) Prepare a schedule of expected cash disbursements for purchases on account for
the quarter to December 31, 2020.
(c) Prepare a cash budget, with a total column, for the quarter ending December 31,
2020, showing the receipts and payments for each month.
(d) All businesses in the industry in which L & P Merchandising operates are required
to maintain a minimum cash balance of $125,000 each month. Based on the
budget prepared, will the business be meeting this requirement? Suggest three (3)
possible steps (other than borrowing), that may be taken by the management of
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