Question

The management accountant at L&P Merchandising & More, Michael Stona, is in the process of preparing the cash budget for the business for the quarter ending December 31, 2020. Extracts from the sales and purchases budgets are as follows: Month Cash Sales Purchases 2020 Sales On On Account 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 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, 790: 60% in the month of sale 30% in the first month following the sale 10% in the second month following the sale 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 (ii) 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 depreciation on this motor vehicle at that time is expected to be $475,000. The employee will be allowed to pay a deposit equal to 40of the selling price in November and the balance settled in four equal amounts from December 2020 to March of 2021.
DJES MILTOSoft Microsoft Edge_Bwekyb3d8bbwe/TempState/Downloads/Discussion%20Question Week LJUUN V + Fit to page Page view A Rea 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. 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 45% per annum is also expected to be collected - Page 1 (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 Merchandising has negotiated with a tenant to rent office space to her beginning November L. The rental 18 $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 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. The cash balance on September 30, 2020 is expected to be an overdraft of $ 138,000 (xi) 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. Prepare a cash budget, with a total column, for the quarter ending December 31. 2020, showing the receipts and payments for each month. (a) All businesses in the industry in which L 8 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 the business to improve the organization's cash flow

Answer 1

Answer:

L&P Merchandising & More, Michael Stona

a) Schedule of Budgeted Cash Collections for October to December 2020:

                                        October     November    December  Quarter Total

Cash Sales                     $132,680     $105,900     $216,000    $454,580

Credit Sales:

 60% month of sale     $432,000     $390,000    $480,000   $1,302,000

    less 5% discount         (21,600)        (19,500)       (24,000)         (65,100)

 30% month following $180,000     $216,000     $195,000       $591,000

 10% second month      $48,000      $60,000       $72,000       $180,000

Other cash collections:

 Sale of Motor Vehicle                      $80,000       $30,000       $110,000

 Sale of investments    $480,000                                              $480,000

 Investment interest      $54,000                                               $54,000

 Rental & Safety Deposit                 $135,000       $45,000    $180,000

Total Collections        $1,305,080   $967,400   $1,014,000 $3,286,480

b) Schedule of Expected Cash Disbursements for Purchases on Account for the quarter to December 31, 2020:

                                       October    November    December  Quarter Total

Credit Purchases:

 80% purchase month $384,000   $320,000     $400,000   $1,104,000

  less 3% cash discount   (11,520)        (9,600)         (12,000)        (33,120)

 20% following month     72,000       96,000          80,000       248,000

Total disbursement     $444,480   $406,400      $468,000   $1,318,880

c) Cash Budget:

                                     October    November    December  Quarter Total

Beginning balance    ($138,000)   (220,400)    (602,400)

Cash Receipts         $1,305,080    $967,400   $1,014,000    $3,286,480

Less purchases        ($444,480)  ($406,400)  ($468,000)    ($1,318,880)

Less fixed expenses  (135,000)      (135,000)     (135,000)       (405,000)

Less other expenses  (58,000)       (58,000)       (58,000)        (174,000)

Less Rea Equipment                                           (240,000)      (240,000)

Wages & Salaries     (245,000)     (245,000)     (245,000)      (735,000)

Retroactive wages   (380,000)      (380,000)                           (760,000)

Cash balance            (95,400)       (477,400)     (734,400)

Minimum balance   (125,000)        (125,000)     (135,000)

Bank Overdraft      (220,400)       (602,400)     (859,400)

d) Will the business meet the required minimum cash balance of $125,000?

No.

e) Three steps other than borrowing to improve cash flow:

1) The volume of Sales must be increased.

2) Trade terms should be improved with customers and suppliers.

3) Expenses must be controlled to reduce outlay.

Explanation:

a) Sales Budget

Month           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

b) Accounts Receivables' credit terms are 5/30, net 90 days.  This means that cash discounts of 5% are allowed for settlements within 30 days, and the maximum credit period is 90 days.

c) Sale of Motor Vehicle:

Cost of Vehicle            $650,000

less Acc. Depreciation $475,000

Book Value                   $175,000

Profit on sale                 $25,000

Selling Price                 $200,000

40% of $200,000 = $80,000

Quarter receipts = $30,000 ($200,000 - 80,000) /4

c) Safety Deposit is equal to two months rental = $540,000/12 * 2 = $90,000.

First Rental + Safety Deposit = $135,000 ($540,000/12 * 3)

d) A cash budget helps management to forecast its cash collections and disbursements.