Chapter 22, Problem 7AP

1.

To determine

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

Explanation of Solution

Cash receipts Budget: This budget gives an estimation of all the cash inflows of a business for the future financial period.

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.

To determine

Compute the budgeted ending inventories (in units) for April, May, June, and July.

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	$\times$ 20%	$\times$ 20%	$\times$ 20%	$\times$ 20%
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.

To determine

Prepare the merchandise purchase budgets for May, June, and July.

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	$\times$$110	$\times$$110	$\times$$110
Budgeted cost of merchandise purchases	$308,000	$638,000	$523,600

Table (3)

4.

To determine

Compute the cash payments on product purchases for June and July.

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.

To determine

Prepare a cash budget for June and July including any loan activity and interest expense and Compute the loan balance at the end of each month.

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	$679,797
Preliminary cash balance (3)$=$(1)$+$(2)	$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.

$\begin{array}{c}\text{Interest expense for June=}\left(\begin{array}{l}\text{Loan balance on May 31}\times \\ \text{Interest rate per month}\end{array}\right)\\ =\$25,000\times \left(\frac{12\%\text{ per annum}}{\text{12 month in a year}}\right)\\ =\$250\end{array}$

Calculate loan balance at the end of June.

$\begin{array}{c}\text{Loan balance at the end of June =}\left(\begin{array}{l}\text{Loan balance at the end of May}+\\ \text{Additional loan from bank}\end{array}\right)\\ =\$25,000\text{+\$18,650}\\ =\$43,650\end{array}$

Calculate the amount interest expense for July.

$\begin{array}{c}\text{Interest expense for July}\text{=}\left(\begin{array}{l}\text{Loan balance on June 30}\times \\ \text{Interest rate per month}\end{array}\right)\\ =\$43,650\times \left(\frac{12\%\text{ per annum}}{\text{12 month in a year}}\right)\\ =\$437\end{array}$

Calculate loan balance at the end of July.

$\begin{array}{c}\text{Loan balance at the end of July =}\left(\begin{array}{l}\text{Loan balance at the end of June}-\\ \text{Additional loan from bank}\end{array}\right)\\ =\$43,650-\$43,650\\ =\$0\end{array}$

6.

To determine

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.

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.