
Concept explainers
1.
Compute the amount of cash collection form the credit sales in each of the month of June and July.
1.

Explanation of Solution
Cash receipts Budget: This budget gives an estimation of all the
Compute the amount of cash collection form the credit sales in each of the month of June and July.
From sales in | Total | % Collected | June | July |
April | $720,000 | 28% | $201,600 | |
May | $360,000 | 50% | $180,000 | |
28% | $100,800 | |||
June | $1,080,000 | 20% | $216,000 | |
50% | $540,000 | |||
July | $900,000 | 20% | $180,000 | |
Total collected | $597,600 | $820,800 |
Table (1)
2.
Compute the budgeted ending inventories (in units) for April, May, June, and July.
2.

Explanation of Solution
Inventory: The account that reports the cost of unsold goods for a business is called inventory. Based on the accounting cycle, inventory is categorized as opening inventory that is the balance of inventory at the beginning of accounting period and closing inventory that is the balance of inventory at the end of accounting period.
Compute the budgeted ending inventories (in units) for April, May, June, and July.
Particulars | April | May | June | July |
Next month’s budgeted sales | 2,000 | 6,000 | 5,000 | 3,800 |
Multiply: Ratio of inventory to future sales | ||||
Budgeted “base” ending inventory | 400 | 1,200 | 1,000 | 760 |
Add: safety stock | 100 | 100 | 100 | 100 |
Budgeted ending inventory | 500 | 1,300 | 1,100 | 860 |
Table (2)
3.
Prepare the merchandise purchase budgets for May, June, and July.
3.

Explanation of Solution
Merchandise Purchase Budget
The budget that shows the estimated cost of goods to be purchased to meet expected sales of a merchandiser is known as Merchandise Purchase Budget. It is similar to the production budget that is used by the manufacturer in a manufacturing concern.
Prepare the merchandise purchase budgets for May, June, and July.
Company A | |||
Merchandise Purchases Budgets | |||
For May, June, and July | |||
May | June | July | |
Budgeted ending inventory | $1,300 | $1,100 | 860 |
Add: Budgeted sales | $2,000 | $6,000 | 5,000 |
Required units of available merchandise | $3,300 | $7,100 | 5,860 |
Less: Beginning inventory | -$500 | -$1,300 | -1,100 |
Budgeted purchases (units) | $2,800 | $5,800 | 4,760 |
Multiply: Budgeted cost per unit | |||
Budgeted cost of merchandise purchases | $308,000 | $638,000 | $523,600 |
Table (3)
4.
Compute the cash payments on product purchases for June and July.
4.

Explanation of Solution
Compute the cash payments on product purchases for June and July.
From purchases in | Total | % Paid | June | July |
May | $308,000 | 40% | $123,200 | |
June | $638,000 | 60% | $382,800 | |
40% | $255,200 | |||
July | $523,600 | 60% | $314,160 | |
Total paid | $506,000 | $569,360 |
Table (4)
5.
Prepare a
5.

Explanation of Solution
Cash Budget: The cash budget is a part of the financial statements which is a plan for the cash receipts and expenses for a particular accounting period. This budget gives an estimation of all the cash inflows and outflows of a business for the given financial period.
Prepare a cash budget for June and July.
Company A | ||
Cash Budget | ||
For June and July | ||
Particulars | June | July |
Beginning cash balance | $100,000 | $100,000 |
Cash receipts from customers | $597,600 | $820,800 |
Total available cash (1) | $697,600 | $920,800 |
Cash disbursements | ||
Payments on purchases | $506,000 | $569,360 |
Selling and administrative expenses | $110,000 | $110,000 |
Interest expense | $250 | $437 |
Total disbursements (2) | $616,250 | $679,797 |
Preliminary cash balance (3) | $81,350 | $241,003 |
Additional loan from bank | $18,650 | $0 |
Repayment of loan to bank | $43,650 | |
Ending cash balance | $100,000 | $197,353 |
Ending loan balance | $43,650 | $0 |
Table (5)
Working note:
Calculate the amount interest expense for June.
Calculate loan balance at the end of June.
Calculate the amount interest expense for July.
Calculate loan balance at the end of July.
6.
Identify whether the company need to borrow more than $18,000 in June, based on the analysis of cash budget, and suggest some reasons for knowing the loan needs in advance.
6.

Explanation of Solution
Cash budget for the month of June indicates that the company may need to borrow additional funds more than $18,000 in June.
Management must be well informed about the future supply of cash for meeting the loan needs in advance, and the management can be able to enter into new negotiations for borrowing money for immediate need of cash. A good cash budget helps the management in negotiating the loan terms.
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Chapter 22 Solutions
Principles of Financial Accounting.
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