AM is a trading
AM is a trading entity. Purchases are on credit, with 70% paid in the month following the date of
purchase and 30% paid in the month after that.
Sales are partly on credit and partly for cash. Customers who receive credit are given 30 days to
pay. On average 60% pay within30 days, 30% pay between 30 and 60 days and 5% pay between
60 and 90 days. The balance is written off as irrecoverable. Other overheads, including salaries,
are paid within the month incurred.
AM plan to purchase new equipment at the end of June 2015, the expected cost of which is
P250,000. The equipment will be purchases on 30 days credit, payable at the end of July.
The cash balance on 1 May 2015 is P96,000.
The actual/budgeted figures for the six month to July 2015 were:
| ACTUAL | BUDGETED | |||||
| FEB P000 | MARCH P000 | APRIL P000 | MAY P000 | JUNE P000 | JULY P000 | |
| Credit sales | 100 | 100 | 110 | 110 | 120 | 120 |
| Cash sales | 30 | 30 | 35 | 35 | 40 | 40 |
| Credit Purchases | 45 | 50 | 50 | 55 | 55 | 60 |
| other overhead expenses | 40 | 40 | 40 | 50 | 50 | 50 |
Required:
a. Prepare a monthly
b. Assess the likelihood of AM being able to pay for the equipment when it falls due.
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