Z & J Merchandising & More is a family-owned auto-parts store. You are the management accountant of the concern and have been given the task of preparing the cash budget for the business for the quarter ending March 31, 2021. Your data collection has yielded the following: Month November 2020 – March 2021 cash sales Sales on account Purchases November $151,100 $480,000 $390,000 December $145,500 $600,000 $360,000 January $159,025 $700,000 $505,000 February $169,350 $650,000 $400,000 March $176,200 $800,000 $518,000 (ii) 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 2/30, n90: 45% in the month of sale 30% in the first month following the sale 25% in the second month following the sale (iii) Expected purchases include cash purchases of $25,000 in January and $18,000 in March. All other purchases are on account. Accounts payable are settled as follows, in accordance with the credit terms 4/30, n60: 75% in the month in which the inventory is purchased 25% in the following month (iv) The management of Z & J Merchandising & More is in the process of upgrading its fleet of motor vehicles. During March the company expects to sell an old Toyota Corolla motorvehicle that cost $500,000 at a gain of $45,000. Accumulated depreciation on this motorvehicle at that time is expected to be $340,000. The employee will be allowed to pay adeposit equal to 60% of the selling price in March; the balance will be settled in two equals amounts in April & May of 2021. (v) An air conditioning unit, which is estimated to cost $300,000, will be purchased in February. The manager has made arrangements with the suppliers to make a cash deposit of 40%upon signing of the agreement in February. The balance will be settled in four (4) equal monthly instalments beginning March 2021. vi) A long-term bond purchased by Z & J Merchandising & More 4 years ago, with a face value of $500,000 will mature on January 20, 2021. 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 5½% per annum is also expected to be collected. (vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,016,000 per annum, [including depreciation on non-current assets of $42,000 per month and are settled monthly. (viii) Other operating expenses are expected to be $177,000 per quarter and are settled monthly. (ix) The management of Z & J Merchandising & More has negotiated with a tenant to rent office space to her beginning February 1. The rental is $540,000 per annum. The first month’srent along with one month’s safety deposit is expected to be collected on February 1. Thereafter, monthly rental income becomes due at the beginning of each month. (x) Wages and salaries are expected to be $2,976,000 per annum and will be paid monthly. (xi) As part of its investing activities, the management of Z & J Merchandising & More has justconcluded an expansion project relating to the business’s storage facilities. The projectrequired capital outlay of $1,800,000 and was funded by a loan from a family member, whois a partner in the business. $340,000 of the principal along with interest of $35,000 will become due and payable in January 2021. (xii) The cash balance on March 31, 2021 is expected to be an overdraft of $92,000. REQUIREMENTS > Another team member who is preparing the Budgeted Balance Sheet for the business for the same quarter and has asked you to furnish him with the figures for the expected trade receivables and payables to be included in the statement. Is that a reasonable request? If yes, what should these amounts be?
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.
Z & J Merchandising & More is a family-owned auto-parts store. You are the
|
Month November 2020 – March 2021
|
cash sales |
Sales on account |
Purchases |
|
November |
$151,100 |
$480,000 |
$390,000
|
|
December |
$145,500 |
$600,000 |
$360,000 |
|
January |
$159,025 |
$700,000 |
$505,000 |
|
February |
$169,350 |
$650,000 |
$400,000 |
|
March |
$176,200 |
$800,000 |
$518,000 |
|
|
|
|
|
(ii) 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 2/30, n90:
45% in the month of sale
30% in the first month following the sale
25% in the second month following the sale
(iii) Expected purchases include cash purchases of $25,000 in January and $18,000 in March.
All other purchases are on account. Accounts payable are settled as follows, in accordance
with the credit terms 4/30, n60:
75% in the month in which the inventory is purchased
25% in the following month
(iv) The management of Z & J Merchandising & More is in the process of upgrading its fleet of
motor vehicles. During March the company expects to sell an old Toyota Corolla motorvehicle that cost $500,000 at a gain of $45,000.
(v) An air conditioning unit, which is estimated to cost $300,000, will be purchased in February.
The manager has made arrangements with the suppliers to make a cash deposit of 40%upon signing of the agreement in February. The balance will be settled in four (4) equal monthly instalments beginning March 2021.
- vi) A long-term bond purchased by Z & J Merchandising & More 4 years ago, with a face value of $500,000 will mature on January 20, 2021. 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 5½% per annum is also expected to be collected.
(vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,016,000 per annum, [including depreciation on non-current assets of $42,000 per month and are settled monthly.
(viii) Other operating expenses are expected to be $177,000 per quarter and are settled monthly.
(ix) The management of Z & J Merchandising & More has negotiated with a tenant to rent office
space to her beginning February 1. The rental is $540,000 per annum. The first month’srent along with one month’s safety deposit is expected to be collected on February 1.
Thereafter, monthly rental income becomes due at the beginning of each month.
(x) Wages and salaries are expected to be $2,976,000 per annum and will be paid monthly.
(xi) As part of its investing activities, the management of Z & J Merchandising & More has justconcluded an expansion project relating to the business’s storage facilities. The projectrequired capital outlay of $1,800,000 and was funded by a loan from a family member, whois a partner in the business. $340,000 of the principal along with interest of $35,000 will become due and payable in January 2021.
(xii) The cash balance on March 31, 2021 is expected to be an overdraft of $92,000.
REQUIREMENTS
> Another team member who is preparing the Budgeted Balance Sheet for the business for the same quarter and has asked you to furnish him with the figures for the expected trade receivables and payables to be included in the statement. Is that a reasonable request? If yes, what should these amounts be?
> Upon receipt of the budget the team manager has now informed you that the management of Z & J Merchandising & More have indicated a desire to maintain a minimum cash
>balance of $155,000 each month. Based on the budget prepared, will the business be achieving this desired target? Given that the management does not wish to borrow any funds from outside sources, suggest three (3) internal strategies that the business mayemploy in order to improve the organization’s monthly cash flow. Each strategy must be fully explained.
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