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Chapter 20: Q6PSA (page 926)

During the last week of August, Oneida Company’s owner approaches the bank for a \(100,000 loan to be made on September 2 and repaid on November 30 with annual interest of 12%, for an interest cost of \)3,000. The owner plans to increase the store’s inventory by \(80,000 during September and needs the loan to pay for inventory acquisitions. The bank’s loan officer needs more information about Oneida’s ability to repay the loan and asks the owner to forecast the store’s November 30 cash position. On September 1, Oneida is expected to have a \)5,000 cash balance, \(159,100 of net accounts receivable, and \)125,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash payments for the next three months follow.

The budgeted September merchandise purchases include the inventory increase. All sales are on account. The company predicts that 25% of credit sales is collected in the month of the sale, 45% in the month following the sale, 20% in the second month, 9% in the third, and the remainder is uncollectible. Applying these percents to the August credit sales, for example, shows that \(96,750 of the \)215,000 will be collected in September, \(43,000 in October, and \)19,350 in November. All merchandise is purchased on credit; 80% of the balance is paid in the month following a purchase, and the remaining 20% is paid in the second month. For example, of the \(125,000 August purchases, \)100,000 will be paid in September and $25,000 in October. Required Prepare a cash budget for September, October, and November. Show supporting calculations as needed.

Short Answer

Expert verified

The ending cash balance for the month of November will be $22,600.

Step by step solution

01

Introduction

Total sales of an organization is the summation of cash sales and credit sales during the year.

02

Cash budget

Oneida Company
Cash budget
For the month of September, October and November

Particulars

September

October

November

Cash

$5,000

$99,250

$69,500

Cash receipts:

Collection on accounts receivables

$159,250

$249,250

$338,100

Receipts from bank loan

$100,000

Total cash available

$264,250

$348,500

$407,600

Cash disbursements:

Payments on accounts payable

$100,000

$217,000

$228,000

Payroll

$20,000

$22,000

$24,000

Rent

$10,000

$10,000

$10,000

Other expenses

$35,000

$30,000

$20,000

Repayment on bank loan

$100,000

Interest on bank loan

$3,000

Total cash payments

$165,000

$279,000

$385,000

Ending cash balance

$99,250

$69,500

$22,600

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Most popular questions from this chapter

Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

a. The company’s single product is purchased for \(30 per unit and resold for \)55 per unit. The expected inventory level of 5,000 units on December 31, 2017, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,000 units; February, 9,000 units; March, 11,000 units; and April, 10,000 units.

b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, \(125,000 is collected in January and the remaining \)400,000 is collected in February.

c. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2017, accounts payable balance, \(80,000 is paid in January 2018 and the remaining \)280,000 is paid in February 2018.

d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are \(60,000 per year.

e. General and administrative salaries are \)144,000 per year. Maintenance expense equals \(2,000 per month and is paid in cash.

f. Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, \)36,000; February, \(96,000; and March, \)28,800. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.

g. The company plans to buy land at the end of March at a cost of \(150,000, which will be paid with cash on the last day of the month.

h. The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of \)25,000 at the end of each month.

i. The income tax rate for the company is 40%. Income taxes on the first quarter’s income will not be paid until April 15.

Required Prepare a master budget for each of the first three months of 2018; include the following component budgets (show supporting calculations as needed, and round amounts to the nearest dollar):

1. Monthly sales budgets (showing both budgeted unit sales and dollar sales).

2. Monthly merchandise purchases budgets.

3. Monthly selling expense budgets.

4. Monthly general and administrative expense budgets.

5. Monthly capital expenditures budgets.

6. Monthly cash budgets.

7. Budgeted income statement for the entire first quarter (not for each month).

8. Budgeted balance sheet as of March 31, 2018.

For each of the following items 1 through 5, indicate yes if the item is an important budgeting guideline or no if it is not.

1. Employees should have the opportunity to explain differences from budgeted amounts.

2. Budgets should include budgetary slack.

3. Employees impacted by a budget should be consulted when it is prepared.

4. Goals in a budget should be set low so targets can be reached.

5. Budgetary goals should be attainable.

Ramos Co. provides the following sales forecast and production budget for the next four months:

The company plans for finished goods inventory of 120 units at the end of June. In addition, each finished unit requires 5 pounds of direct materials and the company wants to end each month with direct materials inventory equal to 30% of next month’s production needs. Beginning direct materials inventory for April was 663 pounds. Direct materials cost \(2 per pound. Each finished unit requires 0.50 hours of direct labor at the rate of \)16 per hour. The company budgets variable overhead at the rate of \(20 per direct labor hour and budgets fixed overhead of \)8,000 per month. Prepare a direct materials budget for April, May, and June.

Music World reports the following sales forecast: August, \(150,000; and September, \)170,000. Cash sales are normally 40% of total sales and all credit sales are expected to be collected in the month following the date of sale. Prepare a schedule of cash receipts for September.

Near the end of 2017, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

a. The company’s single product is purchased for \(30 per unit and resold for \)45 per unit. The expected inventory level of 5,000 units on December 31, 2017, is more than management’s desired level for 2018, which is 25% of the next month’s expected sales (in units). Expected sales are: January, 6,000 units; February, 8,000 units; March, 10,000 units; and April, 9,000 units.

b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the \(525,000 accounts receivable balance at December 31, 2017, \)315,000 is collected in January 2018 and the remaining \(210,000 is collected in February 2018.

c. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the \)360,000 accounts payable balance at December 31, 2017, \(72,000 is paid in January 2018 and the remaining \)288,000 is paid in February 2018.

d. Sales commissions equal to 20% of sales dollars are paid each month. Sales salaries (excluding commissions) are \(90,000 per year.

e. General and administrative salaries are \)144,000 per year. Maintenance expense equals \(3,000 per month and is paid in cash.

f. Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, \)72,000; February, \(96,000; and March, \)28,800. This equipment will be depreciated using the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.

g. The company plans to buy land at the end of March at a cost of \(150,000, which will be paid with cash on the last day of the month.

h. The company has a contract with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans are made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of \)36,000 at the end of each month.

i. The income tax rate for the company is 40%. Income taxes on the first quarter’s income will not be paid until April 15.

Required Prepare a master budget for each of the first three months of 2018; include the following component budgets (show supporting calculations as needed, and round amounts to the nearest dollar):

1. Monthly sales budgets (showing both budgeted unit sales and dollar sales).

2. Monthly merchandise purchases budgets.

3. Monthly selling expense budgets.

4. Monthly general and administrative expense budgets.

5. Monthly capital expenditures budgets.

6. Monthly cash budgets.

7. Budgeted income statement for the entire first quarter (not for each month).

8. Budgeted balance sheet as of March 31, 2018.
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