Upon receipt of the budget, the team manager, June Jackson, has now informed you that, in keeping with industry players, the management of Pelican Merchandising have indicated an industry requirement to maintain a minimum cash balance of $185,000 each month. She has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing. Based on the budget prepared, will the business be achieving this desired target? Suggest three (3) internal strategies that may be employed by management to improve the organization’s monthly cash flow and militate against or reduce any possible shortfall reflected in the budget prepared. Each strategy must be fully explained.
Upon receipt of the budget, the team manager, June Jackson, has now informed you that, in keeping with industry players, the management of Pelican Merchandising have indicated an industry requirement to maintain a minimum cash balance of $185,000 each month. She has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing. Based on the budget prepared, will the business be achieving this desired target? Suggest three (3) internal strategies that may be employed by management to improve the organization’s monthly cash flow and militate against or reduce any possible shortfall reflected in the budget prepared. Each strategy must be fully explained.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
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.
Question
Upon receipt of the budget, the team manager, June Jackson, has now informed you that, in keeping with industry players, the management of Pelican Merchandising have indicated an industry requirement to maintain a minimum cash balance of $185,000 each month. She has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing.
Based on the budget prepared, will the business be achieving this desired target? Suggest three (3) internal strategies that may be employed by management to improve the organization’s monthly
Transcribed Image Text:Continued...
(ix) A long-term bond purchased by Pelican Merchandising 2 years ago, with a face value of
$450,000 will mature on January 15, 2022. To meet the financial obligations of the
business, management has decided to liquidate the investment upon maturity. On that date
semi-annual interest computed at a rate of 8%% per annum is also expected to be
collected.
A compensation payment of $355,000 to a former employee for a back injury sustained in
an accident in the business storage facility, not covered by insurance, becomes due and
payable on January 25, 2022.
(x)
(xi) Wages and salaries are expected to be $3,264,000 per annum and will be paid monthly.
(xii) The cash balance on March 31, 2022 is expected to be an overdraft of $253,000
Transcribed Image Text:Pelican Merchandising & More is a family-owned store. The business is now approaching the
end of the year and is in the process of identifying its cash needs for the first quarter of the new
year. You are the management accountant of the entity and have been tasked to prepare the cash
budget for the business for the quarter ending March 31, 2022.
(1)
Extracts from the sales and purchases budgets are as follows:
Month
2021 - 2022
Cash
Sales
Cash
Purchases
Sales
On
Purchases
On
Account
Account
$138,100
$156,500
$170,975
$135,740
$480,000
$600,000
$650,000
$700,000
November 2021
$345,000
$25,800
$44,625
$30,400
$380,000
$400,000
$480,000
December 2021
January 2022
February 2022
March 2022
$226,420
$800,000
$55,100
$540,000
(ii)
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 4/30, n90:
55% in the month of sale
35% in the first month following the sale
8% in the second month following the sale
The remaining 2% is expected to be uncollectible
(ii) Accounts payable are settled as follows, in accordance with the credit terms 2/30, n60:
85% in the month in which the inventory is purchased
15% in the following month
(iv) The management of Pelican Merchandising has negotiated with a tenant to sublet office
space to her beginning February 1. The rental is expected to be $552,000 per annum. The
first month's rent along with one month's safety deposit is expected to be collected on
February 1. Thereafter, monthly rental income becomes due at the beginning of each
month.
(v)
Office Furniture & Fixtures, which is estimated to cost $350,000, will be purchased in
February. The manager has made arrangement with the suppliers to make a cash deposit of
40% upon signing of the agreement in February. The balance will be settled in five (5) equal
monthly instalments beginning March of 2022.
(vi) The management of Pelican Merchandising is in the process of upgrading its fleet of motor
vehidles. During February the business expects to sell an old delivery motor van that cost
$540,000 at a loss of $34,000 to an employee. Accumulated depreciation on this motor van
at that time is expected to be $246,000. The employee will be allowed to pay a deposit
equal to 60% of the selling price in February; the balance will be settled in two equal
amounts in March & April of 2022.
(vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be
$2,088,000 per annum, which include depreciation on non-current assets of $42,000 per
month and are expected to be settled monthly.
(viii) Other operating expenses which accrue evenly throughout the year are expected to be
$696,000 per annum and will be settled monthly.
Continued..
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 6 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education