Question

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Discussion Question _ Budgets
The management accountant at Brookes Merchandising & More, Gary Jeffers, is in
the process of preparing the cash budget for the business for the quarter ending
December 31, 2018. Extracts from the sales and purchases budgets are as follows:

Cash Sales Sales on Account Purchases on account
August $121,000   $480,000 $390,000
September    $95,500 $600,000 $360,000
October   $111,205 $720,000    $480,000
November $125,900 $ 650,000 $400,000
December $156,000 $ 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 5/30, n90:

60% in the month of sale
30% in the first month following the sale
10% in the second month following the sale

(ii) Accounts payable are settled as follows, in accordance with the credit terms
3/30, n60:
80% in the month in which the inventory is purchased
20% in the following month

(iii) During December, the management of Brookes Merchandising expects to sell an
old motor vehicle that cost $550,000 at a loss of $35,000. Accumulated
depreciation on this motor vehicle at that time is expected to be $315,000. The
employee will be allowed to pay a deposit equal to 60% of the selling price in
December and the balance settled in two equal amounts in January & February
of 2019.

i) Computer Equipment, which is estimated to cost $480,000, will be purchased in
December. The manager has made arrangements with the seller to make a cash
deposit of 50% of the amount upon signing of the agreement in December, with
the balance to be settled in four equal monthly installments, starting in January
2019.
(iv) A long-term instrument purchased by Brookes Merchandising 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 5½% per
annum is also expected to be collected.

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(v) 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.

(vi) Other operating expenses are expected to be $177,000 per quarter and are
settled monthly.

(vii) The management of Brookes Merchandising has negotiated with a tenant to rent
office space to her beginning November 1. The rental is $540,000 per annum.
The first month’s rent along with one month’s safety deposit is expected to be
collected on November 1. Thereafter, monthly rental income becomes due at the
beginning of each month.

(viii) Wages and salaries are expected to be $2,940,000 per annum and will be paid
monthly.

(ix) At the recently concluded negotiations between management and the union
representing the workers it was agreed that Brookes Merchandising should
make retroactive payments in the amount of $1,520,000 to employees. The
payment is being settled in four equal tranches. The third payment becomes due
and payable in October of 2018.

(x) The cash balance on September 30, 2018 is expected to be an overdraft of
$158,000

Required:
(a) Prepare a schedule of budgeted cash collections for sales for each of the months
October to December, 2018.
(b) Prepare a schedule of expected cash disbursements for purchases for the
quarter to December 31, 2018.
(c) Prepare a cash budget, with a total column, for the quarter ending December 31,
2018, showing the receipts and payments for each month.
(d) Companies in the industry in which Brookes Merchandising operates are
required to maintain a minimum cash balance of $175,000 each month. Based
on the budget prepared, will the business be meeting this requirement? Suggest
three (3) possible steps (other than borrowing), that may be taken by the
management of the company to improve the organization’s cash flow.

Answer 1

1.

Brookes Merchandising & More

Budgeted Cash collections from Sales
	Aug	Sep	Oct	Nov	Dec	Total
Cash sales			111,205	125,900	156,000	393,105
Sales on Account	480,000	600,000	720,000	650,000	800,000
Cash collections – 60% of same month (5% Discount)			410,400	370,500	456,000	1,236,900
Cash collections – 30% of previous month			180,000	216,000	195,000	591,000
Cash collections – 10% of previous month			48,000	60,000	72,000	180,000
Total cash from sale			749,605	772,400	879,000	2,401,005

2.

Brookes Merchandising & More

Budgeted Payment towards purchases		Sep	Oct	Nov	Dec	Total
Purchases on credit		360,000	480,000	400,000	500,000
Payment 80% same month (3% discount)			357,120	297,600	372,000	1,026,720
Payment 20% in following month			72,000	96,000	80,000	248,000
Total Payment towards purchases			429,120	393,600	452,000	1,274,720

3)  

Brookes Merchandising & More

CASH BUDGET

	Oct	Nov	Dec	Total
Inflow
Total expected inflow from sale	749,605	772,400	879,000	2,401,005
Sale of Motror vehicle (550000-315000-35000)60%			120,000	120,000
Long Term investment -Maturity along with interest ( 500000+(500000*5.5%)/12*3)	506,875			506,875
Rent from Office space (540000/12) – Nov security deposit -45000		90,000	45,000	135,000
Monthly Inflow Total	1,256,480	862,400	1,044,000	3,162,880
Outlfow
Total Payment towards purchases	429,120	393,600	452,000	1,274,720
Purchase of Computer Equipment (50% of 480,000)			240,000	240,000
Fixed Expenses (2016000/12-42000)	126,000	126,000	126,000	378,000
Other operating expenses (177000/3)	59,000	59,000	59,000	177,000
Wages & salaries (2940000/12)	245,000	245,000	245,000	735,000
Retrospective payment to workers (1520000/4)	380,000			380,000
Monthly outflow Total	1,239,120	823,600	1,122,000	3,184,720
Monthly Netflow	17,360	38,800	-78,000	-21,840
Opening balance	-158,000	-140,640	-101,840
Closing balance	-140,640	-101,840	-179,840

D) No it is not meeting the industry requirement of maintaining a balance of $175,000/-  

Possible three ways to meet the industry requirement:-

a) The main reason for insufficient fund is due  suppliers credit period is too small . The 80% of the same month purchases are settled in the within 30 days to avail the discount. If possible negotiate with the suppliers to increase the discount available credit period to 45 Days (present 30 days) or at least the total credit period at least by 90 Days (present 60 Days) and then settle the suppliers on maturity date by foregoing the discount. The disadvantage of this is that it will affect adversely the profitability

b) Increase the proportion of the cash sales by offering more discount. Now it is budgeted 15% of the total sales is cash sales and if the company able to increase the same to 25% or 30% , most of cash collections will be improved and it facilitate to meet the above industrial target

c) Re negotiate with Union force to post pone the retrospective payment to another 2 or 3 months