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covered by insurance, becomes due and payable in April 10. Mahogany Shoe Factory has negotiated with a tenant to rent storage space to him beginning April 1. The rental negotiated is $780,000 per annum. The first month's rent along with one month's safety deposit will be collected from the tenant on April 1. Thereafter, the monthly rental is expected to be received at the beginning of each month. 11. The cash balance on March 31 2016 is expected to be an overdraft of $165,000 Required: a) Prepare a schedule of budgeted cash collections for sales on account for each of the 3 months April to June. b) Prepare a schedule of expected cash disbursements for purchases for the quarter to June 30 2016 c) Prepare a cash budget, with a total column, for the quarter ending June 30, 2016, showing receipts and payments for each month d) Mahogany currently has a loan and one of the covenants is to maintain a minimum cash balance of $150,000 each month. Based on the budget prepared, will the business be meeting this covenant? Suggest four possible steps (other than borrowing) that may be taken by management to improve the cash flow.

covered by insurance, becomes due and payable in April 10. Mahogany Shoe Factory has negotiated with a tenant to rent storage space to him beginning April 1. The rental negotiated is $780,000 per annum. The first month's rent along with one month's safety deposit will be collected from the tenant on April 1. Thereafter, the monthly rental is expected to be received at the beginning of each month. 11. The cash balance on March 31 2016 is expected to be an overdraft of $165,000 Required: a) Prepare a schedule of budgeted cash collections for sales on account for each of the 3 months April to June. b) Prepare a schedule of expected cash disbursements for purchases for the quarter to June 30 2016 c) Prepare a cash budget, with a total column, for the quarter ending June 30, 2016, showing receipts and payments for each month d) Mahogany currently has a loan and one of the covenants is to maintain a minimum cash balance of $150,000 each month. Based on the budget prepared, will the business be meeting this covenant? Suggest four possible steps (other than borrowing) that may be taken by management to improve the cash flow.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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BBC Session 3: Cash Budgets Mahogany Shoe Factory is a family-owned shoe company. The accountant is in the process of preparing the cash budget for the business for the quarter ending June 30 2016. Extracts from the sales and purchases budgets are as follows: Month Purchases on Cash Sales Sales on Account 2016 Account February $70,000 $525,000 $390,000 March $55,000 $640,000 $340,000 April $52,250 $800,000 $400,000 May $51,750 $600,000 $450,000 June $60,000 $720,000 $500,000 1. An analysis of the records shows that trade receivables (accounts receivables) are settled according to the following credit pattern, in accordance with the credit terms 5/30, n/90: 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale 2. Accounts payable are settled as follows, in accordance with the credit terms 2/30, n/60 75% in the month in which the inventory is purchased 25% in the following month 3. In the month of June, old computer equipment with a net book value of $90,000 will be sold for cash to employees at a profit of $20,000. 4. A new point of sale system, which is estimated to cost $1,348,000, will be installed in June. $248,000 of this amount is due to be paid upon installation in June. 5. A money market instrument purchased by the company with a value of $562,500 will mature on April 15, 2016. 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 8% per annum is also expected to be collected.
Transcribed Image Text:BBC Session 3: Cash Budgets Mahogany Shoe Factory is a family-owned shoe company. The accountant is in the process of preparing the cash budget for the business for the quarter ending June 30 2016. Extracts from the sales and purchases budgets are as follows: Month Purchases on Cash Sales Sales on Account 2016 Account February $70,000 $525,000 $390,000 March $55,000 $640,000 $340,000 April $52,250 $800,000 $400,000 May $51,750 $600,000 $450,000 June $60,000 $720,000 $500,000 1. An analysis of the records shows that trade receivables (accounts receivables) are settled according to the following credit pattern, in accordance with the credit terms 5/30, n/90: 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale 2. Accounts payable are settled as follows, in accordance with the credit terms 2/30, n/60 75% in the month in which the inventory is purchased 25% in the following month 3. In the month of June, old computer equipment with a net book value of $90,000 will be sold for cash to employees at a profit of $20,000. 4. A new point of sale system, which is estimated to cost $1,348,000, will be installed in June. $248,000 of this amount is due to be paid upon installation in June. 5. A money market instrument purchased by the company with a value of $562,500 will mature on April 15, 2016. 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 8% per annum is also expected to be collected.
6. Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,860,000 per annum, (including depreciation on non-current assets of $30,000 per month) and is settled monthly 7. Other operating expenses are expected to be $162,000 per quarter and are settled monthly 8. Wages & Salaries are expected to be $2,592,000 per annum and will be paid monthly. 9. A compensation payment of $396,000 to a former employee for an industrial injury, not covered by insurance, becomes due and payable in April 10. Mahogany Shoe Factory has negotiated with a tenant to rent storage space to him beginning April 1. The rental negotiated 80,000 per annum. The first month's rent alo with one month's safety deposit will be collected from the tenant on April 1. Thereafter, the monthly rental is expected to be received at the beginning of each month. 11. The cash balance on March 31 2016 is expected to be an overdraft of $165,000 Required: a) Prepare a schedule of budgeted cash collections for sales on account for each of the 3 months April to June. b) Prepare a schedule of expected cash disbursements for purchases for the quarter to June 30 2016 c) Prepa a cash budget, with a total column, for the quarter ending June 30, 2016, showing receipts and payments for each month d) Mahogany currently has a loan and one of the covenants is to maintain a minimum cash balance of $150,000 each month. Based on the budget prepared, will the business be meeting this covenant? Suggest four possible steps (other than borrowing) that may be taken by management to improve the cash flow.
Transcribed Image Text:6. Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,860,000 per annum, (including depreciation on non-current assets of $30,000 per month) and is settled monthly 7. Other operating expenses are expected to be $162,000 per quarter and are settled monthly 8. Wages & Salaries are expected to be $2,592,000 per annum and will be paid monthly. 9. A compensation payment of $396,000 to a former employee for an industrial injury, not covered by insurance, becomes due and payable in April 10. Mahogany Shoe Factory has negotiated with a tenant to rent storage space to him beginning April 1. The rental negotiated 80,000 per annum. The first month's rent alo with one month's safety deposit will be collected from the tenant on April 1. Thereafter, the monthly rental is expected to be received at the beginning of each month. 11. The cash balance on March 31 2016 is expected to be an overdraft of $165,000 Required: a) Prepare a schedule of budgeted cash collections for sales on account for each of the 3 months April to June. b) Prepare a schedule of expected cash disbursements for purchases for the quarter to June 30 2016 c) Prepa a cash budget, with a total column, for the quarter ending June 30, 2016, showing receipts and payments for each month d) Mahogany currently has a loan and one of the covenants is to maintain a minimum cash balance of $150,000 each month. Based on the budget prepared, will the business be meeting this covenant? Suggest four possible steps (other than borrowing) that may be taken by management to improve the cash flow.
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