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1. You have been asked to prepare a cash budget for Ashton company, a distributor of
exercise equipment. The following information is available about the company’s
operations:
Sales on account are collected over a three-month period in the following ratio: 20% collected in
the month of sale, 60% collected in the month following sale, and 18% collected in the second
month following sale. The remaining 2% is uncollectible.
c. Purchases of inventory will total $280, 000 for December. Thirty percent of a month’s
inventory purchases are paid during the month of the purchase with the balance being
paid the following month. The accounts payable remaining from November’s inventory
purchases total $161,000, all of which will be paid in December.
d. Selling and administrative expenses are budgeted at $430,000 for December. Of this
amount, $50,000 is for depreciation.
e. A new web server for the Marketing Department costing $76,000 will be purchased for
cash during December, and dividends totaling $9,000 will be paid during the month.
f. The company must maintain a minimum cash balance of $20,000. An open line of credit
is available from the company’s bank to bolster the cash position as needed.
Required:
1. Prepare a schedule of expected cash collections for December.
2. Prepare a schedule of expected cash disbursements for materials during December to
suppliers for inventory purchases.
3. Prepare a cash budget for December. Indicate in the financing section any
borrowing/repayment that will be needed during the month.
Question 2
Herbal Care Corp., a distributor of herb-based sun screens, is ready to begin its third quarter,
in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank
to help meet cash requirements during the quarter. Since Herbal Care has experienced
difficulty in paying off its loans in the past, the loan officer at the bank has asked the
company to prepare a cash budget for the quarter. In response to this request, the following
data has been assembled.
a. On July 1, the beginning of the third quarter, the company will have a cash balance of
$44,500.
b. Actual sales for the last two months and budgeted sales for the third quarter follow:
May (actual)……………………$250,000
June (actual)……………………300,000
July (budgeted)…………………400,000
August (budgeted)………………600,000
September (budgeted)…………..320,000
Past experiences show that 25% of a month’s sales are collected in the month of the sale, 70% in
the month following the sale, and 3% in the second month following the sale. The remainder is
uncollectible.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given
below:
July August September
Merchandise purchases……..$240,000 $350,000 $175,000
Salaries and wages…………….45,000 50,000 40,000
Advertising…………………...130,000 145,000 80,000
Rent payments…………………. 9,000 9,000 9,000
Depreciation…………………...10,000 10,000 10,000
Merchandise purchases are paid in full during the month following purchase. Accounts
payable for merchandise purchases on June 30, which will be paid during July, total
$180,000.
e. In preparing the cash budget, assume that the $40,000 loan will be made in July and
repaid in September. Interest on the loan will total $1,200.
Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for
the quarter in total.
2. Prepare a cash budget, by month and in total, for the third quarter.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the
loan be repaid as planned? Explain.
QUESTION 3
Garden Sales Inc., sells garden supplies. Management is planning its cash needs for the
second quarter. The company usually has to borrow money during this quarter to support
peak sales of lawn care equipment, which occur during May. The following information
has been assembled to assist in preparing a cash budget for the quarter:
QUESTION 4
You have just been hired as a new management trainee by Earrings Unlimited, a
distributor of earrings to various retail outlets located in shopping malls across the
country. In the past, the company has done very little in the way of budgeting and at
certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare
comprehensive budgets for the upcoming second quarter in order to show management
the benefits that can accounting and other areas to gather the information gather the
information assessment below.
The company sells many styles of earrings, but all are sold for the same proce-
$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the
next six months follow (in pairs of earrings):
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory
should be on hand at the end of each month to supply 40% of the earrings sold in the following
month.
Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in
the month of purchase; the other half is paid for in the following month. All sales are on credit,
with no discount, and payable within 15 days. The company has found, however, that only 20%
of a month’s sales are collected in the month of sale. An additional 70% is collected in the
following month, and the remaining 10% is collected in the second month following sale. Bad
debts have been negligible.
Monthly operating expenses for the company are given below:
Variable:
Sales commissions………………..4% of sales
Fixed:
Advertising…………………………. $200,000
Rent…………………………………. 18,000
Salaries……………………………… 106,000
Utilities……………………………… 7,000
Insurance expired…………………… 3,000
Depreciation………………………… 14,000
Required:
Prepare a master budget for the three-month period ending June30. Include the following detailed
budgets:
1. a. A sale budget, by month and in total.
b.A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by
month and I total.
d. A schedule of expected cash disbursements for merchandise purchases, by
month and in total.
2. A cash budget. Show the budget by month and in total.