Question

Eye Trendy Corporation is a distributor of frames for sunglasses. The company’s controller is currently preparing a budget for the third quarter of the year. The following information is from company’s financial records: Projected Sales July 3,120 units August 2,000 units September 2,640 units October 3,000 units • Selling price is RM25 per unit • Collections from customers are normally 70 per cent in the month of sale, 20 per cent in the month following sale, and 9 per cent in the second month following the sale. The balance is expected to be uncollectible. Projected Purchases • Purchase price is RM18 per unit. • All frames purchases are on account. 70 per cent of the frames purchased are paid for in the month of purchase; the remaining 30 per cent are paid for in the month after acquisition. • Inventory of frames on 1st July is 1,200 units. The frames inventory at the end of each month equals 20 per cent of sales anticipated for the following month. • The company purchases the frames as needed in multiple quantities of 1,000 units per shipment. Operating Expenses • General and administrative expenses are projected to be RM33,000 for the quarter. The breakdown of these expenses is presented in the following schedule. All cash expenditures will be paid uniformly throughout the quarter: Promotion RM9,000 Insurance RM12,000 Utilities RM7,500 Depreciation RM4,500 Total RM33,000 Other information • Cash proceeds from sale of old equipment amounted to RM5,000 in the month of August. • Purchase of new equipment amounted to RM50,000 is to be made in the month of September. • Eye Trendy is expected to maintain a minimum cash balance of RM20,000 at all times. If the cash balance is less than RM20,000 at the end of each month, the company borrows amounts necessary to maintain this balance. All amounts are repaid out of the subsequent positive cash flow. • The company’s cash balance on 1st July is RM22,000. Required: a. Prepare the following schedules: (i) Expected cash collections for the sales of frames during the third quarter. Show computations by month and in total for the quarter. (7 marks) (ii) Expected Cash disbursements for the purchases of frames during the third quarter. Show computations by month and in total for the quarter. (8 marks) (iii) Expected Cash balance on 30th September. Show computations by month and in total for the quarter. (7 marks) b. Refer to your answer in requirement (a). Prepare a schedule that shows whether or not the company meets the minimum cash requirement and compute the amount of borrowing required, if any, to maintain the firm’s minimum cash balance.

Answer 1

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1. Sales Budget
		Jul	Aug	Sep	Quarter	October
Budgeted Sale units		3,120	2,000	2,640	7,760	3,000
Selling price per unit		$                 25	$                 25	$                 25	$                  25	$                 25
Budgeted Total Sale		$         78,000	$         50,000	$         66,000	$       194,000	$         75,000	$                    -
1a Schedule of Cash collection	70%
	20%
	9%	Jul	Aug	Sep	Quarter	Receivable
Accounts Receivable					$                   -
From July Sale		$         54,600	$         15,600	$           7,020	$         77,220
From August Sale			$         35,000	$         10,000	$         45,000	$           4,500
From Sept Sale				$         46,200	$         46,200	$         19,140
Total Expected Collection in cash		$         54,600	$         50,600	$         63,220	$       168,420	$         23,640
2a Merchandise Purchase Budget
		Jul	Aug	Sep	Quarter	October
Sales		3,120	2,000	2,640	7,760	3,000
Cost of Merchanidise Sale		$           18.00	$           18.00	$           18.00	$            18.00	$           18.00
Budgeted Cost of Merchandise Sold		$         56,160	$         36,000	$         47,520	$       139,680	$         54,000
Desired Ending Inventory	20%	$           7,200	$           9,504	$         10,800	10,800
Total needs		63,360	45,504	58,320	150,480
Less: Beginning Inventory		$         -1,200	$         -7,200	$         -9,504	$          -1,200
Budgeted Purchases		$         62,160	$         38,304	$         48,816	$       149,280
2b Schedule of Expected Cash Disbursment	70%
	30%	Jul	Aug	Sep	Quarter	Payable
Accounts Payable					$                   -
July Pur		$         43,512	$         18,648		$         62,160
Aug Pur			$         26,813	$         11,491	$         38,304
Sep Pur				$         34,171	$         34,171	14,645
Total Disbursment		$         43,512	$         45,461	$         45,662	$       134,635	$         14,645
Working. Cash Budget
		Jul	Aug	Sep	Quarter
Beginning Balance		$         22,000	$         20,000	$         20,000	$         22,000
Add: Cash Collected against sales		$         54,600	$         50,600	$         63,220	$       168,420
Add: Sale proceed from sale of equipment			$           5,000		$            5,000
Total Available Cash		$         76,600	$         75,600	$         83,220	$       195,420
Less: Cash disbursment for:
Material Purchase		$         43,512	$         45,461	$         45,662	$       134,635
Selling and Admin		$         28,500	$         28,500	$         28,500	$         85,500
Purchase of New Equipment				$         50,000	$         50,000
Total Cash Payment		$         72,012	$         73,961	$      124,162	$       270,135
Excess/(Deficit)		$           4,588	$           1,639	$       -40,942	$        -74,715
Borrowing		$         15,412	$         18,361	$         60,942	$         94,715
Repayment					$                   -
Ending Cash Balance		$         20,000	$         20,000	$         20,000	$         20,000