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Janet Wooster owns a retail store that sells new and used sporting equipment. Janet has requested a cash budget for October. After examining the records of the company, you find the following: a. Cash balance on October 1 is $1,118. b. Actual sales for August and September are as follows: c. Credit sales are collected over a three-month period: 40 percent in the month of sale, 36 percent in the next month, and 22 percent in the second month after the sale. The remaining sales are uncollectible. d. Inventory purchases average 70 percent of a month’s total sales. Of those purchases, 45 percent are paid for in the month of purchase. The remaining 55 percent are paid for in the following month. e. Salaries and wages total $3,850 per month. f. Rent is $3,150 per month. g. Taxes to be paid in October are $1,635. h. Janet usually withdraws $3,500 each month as her salary. i. Advertising is $1,500 per month. j. Other operating expenses total $3,800 per month. k. Internet and telephone fees are $320 per month. Janet tells you that she expects cash sales of $5,000 and credit sales of $63,000 for October. She likes to have $3,000 on hand at the end of the month and is concerned about the potential October ending balance. Required: 1. Prepare a cash budget for October. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.) 2. Did the business meet Janet’s desired ending cash balance for October? Assuming that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for meeting the desired cash balance?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 8, Problem 22E
Textbook Problem
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Janet Wooster owns a retail store that sells new and used sporting equipment. Janet has requested a cash budget for October. After examining the records of the company, you find the following:

  1. a. Cash balance on October 1 is $1,118.
  2. b. Actual sales for August and September are as follows:

    Chapter 8, Problem 22E, Janet Wooster owns a retail store that sells new and used sporting equipment. Janet has requested a

  3. c. Credit sales are collected over a three-month period: 40 percent in the month of sale, 36 percent in the next month, and 22 percent in the second month after the sale. The remaining sales are uncollectible.
  4. d. Inventory purchases average 70 percent of a month’s total sales. Of those purchases, 45 percent are paid for in the month of purchase. The remaining 55 percent are paid for in the following month.
  5. e. Salaries and wages total $3,850 per month.
  6. f. Rent is $3,150 per month.
  7. g. Taxes to be paid in October are $1,635.
  8. h. Janet usually withdraws $3,500 each month as her salary.
  9. i. Advertising is $1,500 per month.
  10. j. Other operating expenses total $3,800 per month.
  11. k. Internet and telephone fees are $320 per month.

Janet tells you that she expects cash sales of $5,000 and credit sales of $63,000 for October. She likes to have $3,000 on hand at the end of the month and is concerned about the potential October ending balance.

Required:

  1. 1. Prepare a cash budget for October. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.)
  2. 2. Did the business meet Janet’s desired ending cash balance for October? Assuming that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for meeting the desired cash balance?

1.

To determine

Prepare a cash budget for October.

Explanation of Solution

Cash budget: A cash budget is prepared to estimate the cash receipts and cash payments made during a specific period. It includes cash receipts, cash payments, and short-term financing. It excludes non-cash transactions such as depreciation expense, conversion of bonds to other type of assets, and exchange of non-cash assets for only non-cash assets.

Prepare a cash budget for October:

Table (1)

Working note 1:

Calculate the amount of credit sales:

For October:

Credit sales = (Credit sales for October× Collected % in the month of credit sales)=($63,000×40%)=$25,200

For November:

Credit sales = (Credit sales for September× Collected % in the next month of credit sales)=($62,000×36%)=$22,320

For August:

Credit sales = (Credit sales for August× Collected % in the seconf month after the sale)=($58,000×22%)<

2.

To determine

Explain whether the business achieved the desired ending cash balance for October and state the suggestion for meeting the desired cash balance (owner has no hope for getting the credit for business).

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Chapter 8 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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