Question

On QUESTION 1(40 MARKS) The management accountant at Hawk Electronics Company, Robert Richie, is wwk Electronics Company, Robert Richie, is in the process of preparing the cash budget for the business for th e endine December 31, 2018. Extracts from the sales and purchases budgets are as follows: Month Cash Sales Purchases 2018 Sales On Account Account August $121,100 $480,000 $390,000 September $165,500 $600,000 $360,000 October $131,400 $700,000 $480,000 November $167,350 $650,000 $400,000 December $156,200 $800,000 $500,000 (i) 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 2/30, n90: 45% in the month of sale 30% in the first month following the sale 25% in the second month following the sale (i) Accounts payable are settled as follows, in accordance with the credit terms 4/30, n60: 75% in the month in which the inventory is purchased 25% in the following month The management of Hawk Electronics is in the process of upgrading Its fleet of motor vehicles. During December the company expects to sell an old Toyota Corolla motor vehicle that cost $500,000 at a gain of $45,000. Accumulated depreciation on this motor vehicle at that time is expected to be $345,000. The employee will be allowed to pay a deposit equal to 65% of the selling price in December; the balance will be settled in two equal amounts in January & February of 2019. Computer Equipment, which is estimated to cost $300,000, will be purchased in November. The manager has made arrangements with the suppliers to make a cash deposit of 40% upon signing of the agreement in November. The balance will be settled in four (4) equal monthly instalments beginning December 2018. A long-term bond purchased by Hawk Electronics 4 years ago, with a face value of $500,000 will mature on October 20, 2018. 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 6% per annum is also expected to be collected. (v) (vi) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,016,000 per annum, [including depreciation on non-current assets of $42,000 per month] and are settled monthly. (vil) Other operating expenses are expected to be $171,000 per quarter and are settled monthly.

Answer 1

(a) Schedule of budgeted cash collections for sales:

Particulars	Aug	Sep	Oct	Nov	Dec
Cash Sales			131400	167350	156200
Credit Sales	480000	600000	700000	650000	800000
Receipts from Credit Sales:
45% in same month (with 2% Discount)			308700	286650	352800
30% in the next month			180000	210000	195000
25% in the following month			120000	150000	175000
Total Cash collections from sales			740100	814000	879000

(b) Schedule of expected cash disbursements for purchases :

Particulars	Aug	Sep	Oct	Nov	Dec
Credit Purchases	390000	360000	480000	400000	500000
Payment for Credit Purchases:
75% in same month with 4% discount			345600	288000	360000
25% in next month			90000	120000	100000
Total Expected cash disbursements for Purchases			435600	408000	460000

(c) Cash Budget :

Particulars	Oct	Nov	Dec	Calculations
Budgeted Cash Collections from sales	740100	814000	879000
-Expected cash disbursements for Purchases	-435600	-408000	-460000
65% receipt of sale of old Toyota Motor	0	0	130000	(500000-345000+45000)*65%
40% Cash Deposit for Computer Purchase	0	-120000	0	300000*40%
EMI for Computer Purchase	0	0	-45000	(300000*60%)/4
Quarterly Interest on Investment	7500	0	0	(500000*6%/4)
Fixed Operating Expense	-126000	-126000	-126000	((2016000/12)-42000)
Other Operating Expense	57000	57000	57000	171000/3
One Month safety Deposit from Tenant	0	45000	0	540000/12
Monthly Rental Income	0	45000	45000	540000/12
Wages & Salaries	-242000	-242000	-242000	2904000/12
Principal & Interest payable on external funding	-375000	0	0	300000+75000
Total Changes in cash	-374000	65000	238000
Opening Cash Balance	-154000	-528000	-463000
Closing Cash Balance	-528000	-463000	-225000

(d) Hawk Electronics will not be able to meet requirement of minimum cash balance of $155000 each month.

Possible steps that may be taken by the management to improve organization's cash flow are :

• Account Receivables are given credit period upto 90 days. This can be reduced to collect cash from sales early.
• The credit period given by suppliers is maximum 60 days. Suppliers can be requested to increase credit period.
• 75% of suppliers are paid in the same month. Some of them can be paid in next month to improve cash flows.
• Fixed cash operating expenses are very high. They can be reduced.
• The Principal payment for external funding can be requested to be delayed and paid once cash balances are positive.

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