Odane Cranston, the management accountant at BG Merchandising & More, is in the process of planning the company’s cash needs for the last quarter of 2020. Extracts from the sales and purchases budgets are as follows: Month 2020 Cash Sales Sales On Account Purchases On Account August September October November December $85,000 $75,500 $69,870 $80,030 $63,010 $520,000 $640,000 $760,000 $680,000 $850,000 $420,000 $400,000 $520,000 $440,000 $540,000 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 4/30, n90: 60% in the month of sale 25% in the first month following the sale 15% in the second month following the sale ii) Accounts payable are settled as follows, in accordance with the credit terms 2/30, n60: 80% in the month in which the inventory is purchased 20% in the following month iii) In the month of November, the management of BG Merchandising expects to sell an old motor vehicle that cost $700,000 to an employee at a gain of $45,000. Accumulated depreciation on this motor vehicle at that time is expected to be $585,000. The employee will be allowed to pay a deposit equal to 50% of the selling price in November and the balance will be settled in two equal amounts in December 2020 & January 2021 iv) A money market instrument purchased by BG Merchandising & More with a face value of $440,000 will mature on October 20, 2020. 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. Review Question _ November 2021 Page 2 v) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,160,000 per annum, and are settled monthly. Annual depreciation expense of non-current assets of $744,000 will be included in these costs. vi) The manager of BG Merchandising & More has negotiated with a tenant for rental of office & storage space to him beginning October 2020. The rental is $780,000 per annum. The first month’s rent along with one month’s safety deposit will be collected from the tenant on October 1. Thereafter, the monthly rental in expected to be received at the beginning of each month. vii) Computer equipment, which is estimated to cost $280,000, will be acquired in November. The manager has agreed with the seller to make a cash deposit of 40% of the amount upon signing of the agreement in November, with the balance to be settled in four equal monthly instalments, starting in December 2020 viii) Other operating expenses are expected to be $174,000 per quarter and are settled monthly. ix) Wages and salaries are expected to be $3,156,000 per annum and will be paid monthly. x) At the recently concluded negotiations between management of BG Merchandising and the union representing the workers it was agreed that the business should make retroactive payments in the amount of $1,180,000 to employees. The payment is being settled in four equal tranches. The third payment becomes due and payable in October of 2020. xi) The cash balance on September 30, 2020, is expected to be an overdraft of $148,000. Required: (a) Prepare a schedule of budgeted cash collections for sales on account for each of the months October to December 2020 (b) Prepare a schedule of expected cash disbursements for purchases on account for the quarter to December 31, 2020. (c) Prepare a cash budget, with a total column, for the quarter ending December 31, 2020, showing the receipts & payments for each month. (d) Companies in the industry in which BG Merchandising operates are required to maintain a minimum cash balance of $120,000 each month. Suggest four (4) possible internal measures that may be employed by management to address any expected shortfall reflected in the budget prepared in part (c) above
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Odane Cranston, the
process of planning the company’s cash needs for the last quarter of 2020. Extracts from
the sales and purchases budgets are as follows:
Month
2020
Cash
Sales
Sales
On
Account
Purchases
On
Account
August
September
October
November
December
$85,000
$75,500
$69,870
$80,030
$63,010
$520,000
$640,000
$760,000
$680,000
$850,000
$420,000
$400,000
$520,000
$440,000
$540,000
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
4/30, n90:
60% in the month of sale
25% in the first month following the sale
15% in the second month following the sale
ii) Accounts payable are settled as follows, in accordance with the credit terms 2/30,
n60:
80% in the month in which the inventory is purchased
20% in the following month
iii) In the month of November, the management of BG Merchandising expects to sell an
old motor vehicle that cost $700,000 to an employee at a gain of $45,000.
$585,000. The employee will be allowed to pay a deposit equal to 50% of the selling
price in November and the balance will be settled in two equal amounts in December
2020 & January 2021
iv) A
value of $440,000 will mature on October 20, 2020. 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.
Review Question _ November 2021 Page 2
v) Fixed operating expenses which accrue evenly throughout the year, are estimated to
be $2,160,000 per annum, and are settled monthly. Annual depreciation expense of
non-current assets of $744,000 will be included in these costs.
vi) The manager of BG Merchandising & More has negotiated with a tenant for rental of
office & storage space to him beginning October 2020. The rental is $780,000 per
annum. The first month’s rent along with one month’s safety deposit will be collected
from the tenant on October 1. Thereafter, the monthly rental in expected to be
received at the beginning of each month.
vii) Computer equipment, which is estimated to cost $280,000, will be acquired in
November. The manager has agreed with the seller to make a cash deposit of 40% of
the amount upon signing of the agreement in November, with the balance to be
settled in four equal monthly instalments, starting in December 2020
viii) Other operating expenses are expected to be $174,000 per quarter and are settled
monthly.
ix) Wages and salaries are expected to be $3,156,000 per annum and will be paid
monthly.
x) At the recently concluded negotiations between management of BG Merchandising
and the union representing the workers it was agreed that the business should make
retroactive payments in the amount of $1,180,000 to employees. The payment is
being settled in four equal tranches. The third payment becomes due and payable in
October of 2020.
xi) The cash balance on September 30, 2020, is expected to be an overdraft of $148,000.
Required:
(a) Prepare a schedule of budgeted cash collections for sales on account for each of the
months October to December 2020
(b) Prepare a schedule of expected cash disbursements for purchases on account for the
quarter to December 31, 2020.
(c) Prepare a
2020, showing the receipts & payments for each month.
(d) Companies in the industry in which BG Merchandising operates are required to
maintain a minimum cash balance of $120,000 each month. Suggest four (4) possible
internal measures that may be employed by management to address any expected
shortfall reflected in the budget prepared in part (c) above
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