Question

The management accountant at Fuller Manufacturing ce the process of preparing the cash budget for the business n accountant at Fuller Manufacturing Company, Dean Witter, is in September 30, 2010. Extracts from the sales and purcha ash budget for the business for the quarter ending om the sales and purchases budgets are as follows: September 30+ preparing the at Fuller Manufact Month May June July August September Cash Sales $45,000 $60,000 $38,000 $47,000 $51,000 Sales on Account $480,000 $600,000 $720,000 $640,000 $800,000 Purchases on Account $390,000 $360,000 $450,000 $400,000 $500,000 i) An analysis of the records shows that trade receivables (accounts receivable) ar settled according to the following credit pattern, in accordance with the cres terms 5/30, n90: 60% in the month of sale 20% in the first month following the sale 15% in the second month following the sale The remaining 5% is expected to be uncollectible. ) Accounts payable are settled as follows: 70% in the month in which the inventory is purchased 30% in the following month The credit terms of the suppliers - 10/30, n60. 003_Introduction to cost and Management Accounting

Answer 1

А 1 Solution (a): Budgeted Cash collections 2 3 Particulars July August Year-2010 Amount in $ September Remarks Assumed that the credit pattern 5/30, n/90 is followed only for Trade 51,000 receivables (as mentioned in the question) and not on cash sales 38,000 47,000 4 Cash Sales 5 Cash received from credit sales: 6 For the month of May 72,000 Jul-Being 2nd month following the sale- received 15% of credit sales of May Jul-Being 1st month following the sale- received 20% of credit sales of June 7 For the month of June 120,000 90,000 Aug-Being 2nd month following the sale-received 15% of credit sales of May Jul-Being the month of sale-received 60% of the credit sale amount. Howeverm since credit pattern is 5/30, a 5% discount is offered on 60% of the amount collected Aug-Being 1st month following the sale- received 20% of credit sales of June 8 For the month of July 410,400 144,000 108,000 Sep-Being 2nd month following the sale- received 15% of credit sales of May Aug-Being the month of sale-received 60% of the credit sale amount. Howeverm since credit pattern is 5/30, a 5% discount is offered on 60% of the amount collected 9 For the month of August 364,800 128,000 Sep-Being 1st month following the sale-received 20% of credit sales of June Sep-Being the month of sale-received 60% of the credit sale amount. Howeverm since credit pattern is 5/30, a 5% discount is offered on 60% of the 456,000 amount collected 743,000 10 For the month of September 11 TOTAL COLLECTIONS 12 640,400645,800

в с D 14 15 Solution (b): Budgeted Cash disbursements 16 17 18 Particulars 19 Cash disbursed for credit purchases: Year-2010 Amount in $ September Remarks July August 20 For the month of June 108,000 Jul- Being the following month of purchase-paid 30% of credit purchase of June Jul-Being the month of Purchase-paid 70% of the credit purchase amount. Howeverm since credit terms of supplier is 10/30, a 10% discount is received on 70% of the amount paid 21 For the month of July 283,500 135,000 Aug-Being the following month of purchase-paid 30% of credit purchase of June Aug-Being the month of Purchase-paid 70% of the credit purchase amount. Howeverm since credit terms of supplier is 10/30, a 10% discount is received on 70% of the amount paid 22 For the month of August 252.000 Sep-Being the following month of purchase-paid 30% of credit purchase of 120,000 June Sep-Being the month of Purchase-paid 70% of the credit purchase amount. Howeverm since credit terms of supplier is 10/30, a 10% discount is received 315,000 on 70% of the amount paid 435,000 23 For the month of September 24 TOTAL DISBURSEMENTS 25 391,500 387,000

D E с 31 32 Solution (c): Cash Budget for the quarter ending 30th Sept, 2010 33 Particulars July August Amount in $ September Total Remarks Opening balance of July is given as $190,000 Overdraft, hence taken as a negative amount. (190,000) 116,900 68,700 For Aug and Sep, closing cash balance of previous month will become opening cash balance. 34 Opening Cash balance (A) 35 Receipts 36 Total Collections 640,400 645,800 | 743,000 2,029,200 As per solution a As per point no. iii) of the question 37 Sale of old Motor Vehicle 140,000 Book value of old motor car is $80000 and it is sold at a profit of $60000, hence total sale value will be 80000+60000= $140000 As per point no. iv) of the question 38 Maturity of money market instrument 500,000 500,000 Original value of instrument taken As per point no. iv) of the question 75,000 240,000 1,455,400 645,800 Interest = 500000*20%*3/12 75,000 since quarterly interest is said to be accrued 240,000 As per point no. viii) of the question 2,984,200 883,000 39 Quarterly Interest on money market instrument 40 Loan amount received from bankers 41 Total Receipts (B) 42 43 Payments 44 Total Disbursements 45 Purchase of Motor Vehicle 391,500 387,000 435,000 350,000 1,213,500 As per solution b 350,000 As per point no. iii) of the question As per point no. v) of the question 46 Fixed operating expenses 95,000 95,000 95,000 $1500000 is yearly expense. Per month expense will be 1500000/12= 125000 From this, we need to subtract the non cash expense of depreciation and non current assets $30000 per 285,000 month, hence net expense of $95000 per month As per point no. vi) of the question 96,000 $96000/3 = $32000 settled per month As per point no. vii) of the question 540,000 $2160000/12 = $180000 settled per month As per point no.ix) of the question 47 Other operating expenses 32,000 32,000 32,000 48 Wages and Salary 180,000 180,000 180,000 450,000 1,148,500 694,000 450,000 Jul 2010 payment falls in the period quarter ended 30th Sept 2010 1,092,000 2,934,500 Payment for equipment purchased for 49 retooling of production facility 50 Total Payments (C) 51 52 Closing cash balance (A+B-C) 53 116,900 68,700 (140,300) For negative balance of Sep 2010, the company will have to borrow using overdraft facility.

d. The following are some steps that the company can take to maintain a minimum cash balance of $100000 each month:

1. The Company can lower the sales credit days from 90. For this, the company may offer higher cash discounts.

2. The Company can ask it's suppliers to provide more credit days for payment of purchase amount (instead of having to pay 70% in the month of purchase itself).

3. The company can use the Overdraft facility and withdraw the shortfall each month to maintain a $100000 balance.