Question

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:

Month 2018	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 instalments, 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. Page 2

(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

Req.a

SCHEDULE OF CASH COLLECTIONS FROM AUGUST TO DECEMBER
	August	September	October	November	December
Cash Sales	$     121,000.00	$        95,500.00	$      111,205.00	$      125,900.00	$      156,000.00
Credit Sales Collection: current month Sales	$     288,000.00	$     360,000.00	$      432,000.00	$      390,000.00	$      480,000.00
Last month sales		$     144,000.00	180000	216000	195000
month before last sales			48000	60000	72000
Receipts from sale of the Vehicle					120000
Liquidation of an financial Instrument			500000
Interest on the Asset (500000*5.5%)			27500
Rental Income ($ 540,000/12)				45000	45000
Total Cash Collections	$     409,000.00	$     599,500.00	$ 1,298,705.00	$      836,900.00	$ 1,068,000.00

Req.b

SCHEDULE OF CASH PAYMENTS FROM AUGUST TO DECEMBER
	August	September	October	November	December
Cash Purchases
Credit Purchase Payment : current month Purchase	$     312,000.00	$     288,000.00	$      384,000.00	$      320,000.00	$      400,000.00
Previous month Purchase		$        78,000.00	$        72,000.00	$        96,000.00	$        80,000.00
Purchase of Computer Equipment					$      240,000.00
Actual Payment For Expenses
(2016000-504000)/12	$     126,000.00	$     126,000.00	$      126,000.00	$      126,000.00	$      126,000.00
Other Operating Expenses (177000/3)	$        59,000.00	$        59,000.00	$        59,000.00	$        59,000.00	$        59,000.00
Wages & Salaries ($2,940,000/12)	$     245,000.00	$     245,000.00	$      245,000.00	$      245,000.00	$      245,000.00
Retroactive payments			$      380,000.00
TOTAL CASH PAYMENTS	$     742,000.00	$     796,000.00	$ 1,266,000.00	$      846,000.00	$ 1,150,000.00

Req.c

CASH BUDGET FROM AUGUST TO DECEMBER
	October	November	December
Opening Cash Balance	$   (158,000.00)	$   (125,295.00)	$    (134,395.00)
Total Cash Collections	$ 1,298,705.00	$     836,900.00	$ 1,068,000.00
Total Cash available	$ 1,140,705.00	$     711,605.00	$      933,605.00
Less : Total Cash Payments	$ 1,266,000.00	$     846,000.00	$ 1,150,000.00
Closing Cash Balance	$   (125,295.00)	$   (134,395.00)	$    (216,395.00)

Req. d. Three Steps to improve cash balance

1. Increase Cash Sales  

2. Credit Sales collection in the same month and next month.

3. Payment on credit  purchase can be done in 3 months.

4. After 4th instalment of retroactive payments, the Cash balance will increase