Question

Aztec Company sells its product for $160 per unit. Its actual and budgeted sales follow.

	Units	Dollars
April (actual)	3,500	$	560,000
May (actual)	2,000		320,000
June (budgeted)	5,000		800,000
July (budgeted)	4,000		799,000
August (budgeted)	4,400		704,000

All sales are on credit. Recent experience shows that 24% of credit sales is collected in the month of the sale, 46% in the month after the sale, 24% in the second month after the sale, and 6% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 23% of the next month’s unit sales plus a safety stock of 195 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,224,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $150,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $150,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 14% interest rate. On May 31, the loan balance is $35,500, and the company’s cash balance is $150,000.

Required:
1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.
2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.
5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Answer 1

Aztec Company Sales June 800000 July 799000 Sales Cash Collection schedule of credit sales July April June 134400 147200 192000 May June July Totals 76800 368000 191760 636560 Total 134400 224000 560000 191760 1110160 473600 Total April 0 May June July 560000*0.24 320000*0.46 320000*0.24 800000*0.24 800000*0.46 799000*0.24 June July Totals Ending Inventory July 4000 23% Units End Inv. % Base Ending Inventory Safety Stock April 3500 23% 805 195 1000 May 2000 23% 460 195 655 Jun 5000 23% 1150 195 1345 Aug 4400 23% 1012 195 1207 920 195 1115

Purchase Budget Units Sold Ending Inv. Units available for sale Less:Opening Inv. Units Purchased May 2000 1345 3345 -655 2690 June 5000 1115 6115 -1345 4770 July 4000 1207 5207 - 1115 4092 Total 9000 1207 10207 1345 8862 Cash Payments for Purchases May Total Purchase @110 295900 June 524700 July 450120 Total 974820 June 118360 314820 May June July Total Payments July Total 118360 209880 524700 270072 270072 479952913132 433180 Total June July 295900 x 40% 524700 x 60% 479952 x 40% 450120 x 60% 0 0 May June July Total Payments 0

Cash Budget Beginning Bal Collection from clients June 150000 473600 623600 July 150000 636560 786560 Total 150000 1110160 1260160 Payments Purchase Payments Selling and admin exp Total Payments Excess over payments 433180 102000 535180 88420 479952 102000 581952 204608 913132 204000 1117132 143028 61580 Financing Borrowing Repayment Interest Totals Ending cash balance 61580 -53363 - 1245 6972 150000 -1245 -54608 150000 61580 150000 Loan Balance Loan Bal. on May 31 June Borrowings Loan Bal. on Jun 30 Less:Paid off Loan Bal. on Jul 30 50000 61580 111580 -53363 58217 Interest on repaid amount from 50000 53363 x 14% x 2/12 = 1245 (Since 50000 was part from May) 204608 - X -0.0233x = 150000 1.0233x = 54608 x = 53537