The management accountant at Miller Merchandising & More, Odail Russell is in the process of preparing the cash budget for the business for the fourth quarter of 2021. It is customary for the business to borrow money during this quarter. Extracts from the sales and purchases budgets are as follows: month cash sale sales on account purchases August 85000 640000 420000 september 70,000 550000 550000 october 88550 600000 500000 november 77160 800000 600000 december 174870 500000 450000 40% in the following month 60% in the month in which the inventory is purchased i) An analysis of the records shows that trade receivables are settled according to the following credit pattern, in accordance with the credit terms 4/30, n90: 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale ii) Expected purchases include monthly cash purchases of 5%. All other purchases are on account. Accounts payable are settled as follows, in accordance with the credit terms – 2/30, n60: iii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,680,000 per annum, (including depreciation on non-current assets of $420,000 per annum) and is settled monthly. iv) Wages and salaries are expected to be $2,280,000 per annum and will be paid monthly. v) Other operating expenses are expected to be $108,000 per quarter and will be settled monthly. vi) In the month of November, an old motor vehicle, which cost $650,000, will be sold to an employee at a gain of $30,000. Accumulated depreciation on the motor vehicle at that time is expected to be $540,000. The employee will be allowed to pay a deposit equal to 60% of the selling price in November and the balance settled in two equal amounts in December 2021 & January of 2022. vii) Computer equipment, which is estimated to cost $320,000, will be acquired in November. The manager has made arrangements with the dealer to make a cash deposit of 50% of the amount upon signing of the agreement in November, with the balance to be settled in four equal monthly instalments, starting in December 2021 viii) The management of Miller Merchandising Company has negotiated with a tenant to rent office space to her beginning November 1. The rental is $624,000 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) Taxation of $85,000 has to be settled in December. x) A money market instrument purchased by the company with a face value of $300,000 will mature on October 15, 2021. 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 5% per annum is also expected to be collected. xi) The cash balance at December 31, 2021 is expected to be an overdraft of $236,000. Required: (a) The business needs to have a sense of its future cashflows and therefore requires the preparation of the following: ▪ A cash budget, with a TOTAL COLUMN ON THE RIGHT SIDE, for the quarter ending December 31, 2021, showing the expected cash receipts and payments for each month and the ending cash balance for each of the three months, given that no financing activities took place.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The
| month | cash sale | sales on account | purchases |
| August | 85000 | 640000 | 420000 |
| september | 70,000 | 550000 | 550000 |
| october | 88550 | 600000 | 500000 |
| november | 77160 | 800000 | 600000 |
| december | 174870 | 500000 | 450000 |
40% in the following month
60% in the month in which the inventory is purchased
i) An analysis of the records shows that trade receivables are settled according to the
following credit pattern, in accordance with the credit terms 4/30, n90:
50% in the month of sale
30% in the first month following the sale
20% in the second month following the sale
ii) Expected purchases include monthly cash purchases of 5%. All other purchases are on account. Accounts payable are settled as follows, in accordance with the credit terms –
2/30, n60:
iii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be
$1,680,000 per annum, (including
iv) Wages and salaries are expected to be $2,280,000 per annum and will be paid monthly.
v) Other operating expenses are expected to be $108,000 per quarter and will be settled monthly.
vi) In the month of November, an old motor vehicle, which cost $650,000, will be sold to an employee at a gain of $30,000.
2021 & January of 2022.
vii) Computer equipment, which is estimated to cost $320,000, will be acquired in November. The manager has made arrangements with the dealer to make a cash deposit of 50% of the amount upon signing of the agreement in November, with the balance to be settled in four equal monthly instalments, starting in December 2021
viii) The management of Miller Merchandising Company has negotiated with a tenant to rent office space to her beginning November 1. The rental is $624,000 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)
x) A
xi) The cash balance at December 31, 2021 is expected to be an overdraft of $236,000. Required:
(a) The business needs to have a sense of its future cashflows and therefore requires the preparation of the following:
▪ A cash budget, with a TOTAL COLUMN ON THE RIGHT SIDE, for the quarter ending December 31, 2021, showing the expected cash receipts and payments for each month and the ending cash balance for each of the three months, given that no financing activities took place.
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