Chapter 22, Problem 7BP

1.

To determine

Compute the amount of cash collection form the credit sales in each of the month of March and April.

Explanation of Solution

Cash receipts Budget: This budget gives an estimation of all the cash inflows of a business for the future financial period.

Compute the amount of cash collection form the credit sales in each of the month of March and April.

From sales in	Total	% Collected	March	April
January	$396,000	23%	$91,080
February	$495,000	35%	$173,250
		23%		$113,850
March	$418,000	40%	$167,200
		35%		$146,300
April	$412,500	40%		$165,000
Total collected			$431,530	$425,150

Table (1)

2.

To determine

Compute the budgeted ending inventories (in units) for January, February, March, and April.

Explanation of Solution

Inventory: The account that reports the cost of unsold goods for a business is called inventory. Based on the accounting cycle, inventory is categorized as opening inventory that is the balance of inventory at the beginning of accounting period and closing inventory that is the balance of inventory at the end of accounting period.

Compute the budgeted ending inventories (in units) for January, February, March, and April.

Particulars	January	February	March	April
Next month’s budgeted sales	22,500	19,000	18,750	21,000
Multiply: Ratio of inventory to future sales	$\times$ 20%	$\times$ 20%	$\times$ 20%	$\times$ 20%
Budgeted “base” ending inventory	4,500	3,800	3,750	4,200
Add: Safety stock	100	100	100	100
Budgeted ending inventory	4,600	3,900	3,850	4,300

Table (2)

3.

To determine

Prepare the merchandise purchase budgets for February, March, and April.

Explanation of Solution

Merchandise Purchase Budget

The budget that shows the estimated cost of goods to be purchased to meet expected sales of a merchandiser is known as Merchandise Purchase Budget. It is similar to the production budget that is used by the manufacturer in a manufacturing concern.

Prepare the merchandise purchase budgets for February, March, and April.

Company C
Merchandise Purchases Budgets
For February, March, and April
	February	March	April
Budgeted ending inventory	$3,900	$3,850	$4,300
Add: Budgeted sales	$22,500	$19,000	$18,750
Required units of available merchandise	$26,400	$22,850	$23,050
Less: Beginning inventory	-$4,600	-$3,900	-$3,850
Budgeted purchases (units)	$21,800	$18,950	$19,200
Multiply: Budgeted cost per unit	$\times$$12	$\times$$12	$\times$$12
Budgeted cost of merchandise purchases	$261,600	$227,400	$230,400

Table (3)

4.

To determine

Compute the cash payments on product purchases for March and April.

Explanation of Solution

Compute the cash payments on product purchases for March and April.

From purchases in	Total	% Paid	March	April
February	$261,600	70%	$183,120
March	$227,400	30%	$68,220
		70%		$159,180
April	$230,400	30%		$69,120
Total paid			$251,340	$228,300

Table (4)

5.

To determine

Prepare a cash budget for March and April including any loan activity and interest expense and Compute the loan balance at the end of each month.

Explanation of Solution

Cash Budget: The cash budget is a part of the financial statements which is a plan for the cash receipts and expenses for a particular accounting period. This budget gives an estimation of all the cash inflows and outflows of a business for the given financial period.

Prepare a cash budget for March and April.

Company C
Cash Budget
For March and April
Particulars	March	April
Beginning cash balance	$50,000	$58,070
Cash receipts from customers	$431,530	$425,150
Total available cash (1)	$481,530	$483,220
Cash disbursements
Payments on purchases	$251,340	$228,300
Selling and administrative expenses	$160,000	$160,000
Interest expense	$120	$0
Total disbursements (2)	$411,460	$388,300
Preliminary cash balance (3)$=$(1)$+$(2)	$70,070	$94,920
Additional loan from bank
Repayment of loan to bank	-$12,000	________
Ending cash balance	$58,070	$94,920
Ending loan balance	$0	$0

Table (5)

Working note:

Calculate the amount interest expense for March.

$\begin{array}{c}\text{Interest expense for June=}\left(\begin{array}{l}\text{Loan balance on February 28}\times \\ \text{Interest rate per month}\end{array}\right)\\ =\$12,000\times \left(\frac{12\%\text{ per annum}}{\text{12 month in a year}}\right)\\ =\$120\end{array}$

6.

To determine

Identify whether the company must borrow additional funds at the end of March, based on the analysis of cash budget, and suggest some reasons for knowing the loan needs in advance.

Explanation of Solution

Cash budget for the month of March indicates that the company has no need to borrow additional funds at the end of March, because it has enough cash balance at the end of the March month.

However, management must be well informed about the future supply of cash for meeting the loan needs in advance. A good cash budget helps the management in negotiating the loan terms.