Chapter 22, Problem 7BPSB

To determine

1.

Introduction:

The cash collection of the credit sales for a company is with respect to the policy designed and followed by the management.

To calculate:

To calculate the cash collections of the credit sales (account receivable) in each of the months of March and April respectively.

Answer to Problem 7BPSB

Solution:

The table below shows the cash collections of the credit sales (account receivable) in each of the months of March and April:

Particulars	March ($)	April ($)
Cash collection of January credit sales	91,080	0
Cash collection of February credit sales	173,250	113,850
Cash collection of March credit sales	167,200	146,300
Cash collection of April credit sales	0	165,000
Cash collections of the credit sales	431,530	425,150

Explanation of Solution

The cash collections of the credit sales of a company is recently experienced as 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the second month after the sale and 2% proves to be uncollectible as per the information provided. Therefore, the same concept is applied to calculate the cash collections from the credit sales for the given months respectively.

To determine

2.

Introduction:

A production budget is a tool to identify the inventory levels as required by the management for its business operations. We can also calculate the budgeted ending inventories in units, using a production budget and sales forecast.

To calculate:

To calculate the budgeted ending inventories (units) for January, February, March and April respectively.

Answer to Problem 7BPSB

Solution:

The table below shows the budgeted ending inventories (units) for January, February, March and April:

Particulars	Units
	January	February	March	April
Inventory at the end of the month will be 20% of next month’s unit sales	4,500	3,800	3,750	4,200
Add- Safety Stock	100	100	100	100
Inventory at the end of the month	4,600	3,900	3,850	4,300

Explanation of Solution

The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. Therefore, the sales forecast is 22,500 units for February, 19,000 units for March, 18,750 units for April and 21,000 units for May as per the information provided.

To determine

3.

Introduction:

A purchases budget contains the amount of inventory that a company must purchase during the budget period. The amount stated in the budget is the amount needed to ensure that there is sufficient inventory on hand to meet customer orders for products.

To calculate:

To calculate the merchandise purchases budget for February, March and April.

Answer to Problem 7BPSB

Solution:

The table below shows the merchandise purchases budget for February, March and April:

Particulars	Units
	February	March	April
Budgeted sales	22,500	19,000	18,750
Add- Inventory at the end of the month	3,900	3,850	4,300
Less- Inventory at the beginning of the month	4,600	3,900	3,850
Purchases budget	21,800	18,950	19,200
(*) Purchase price per unit	$12	$12	$12
Purchases budget (dollar amount)	$261,600	$227,400	$230,400

Explanation of Solution

The inventory positions at the beginning and end of the month as required by the management of the company adjusted to the budgeted sales quantity as given, have been used to obtain the budgeted purchases quantity respectively. The budgeted sales quantity and the inventory units required at the end of the month have been added, while the inventory units at the beginning of the month is reduced, to calculate the budgeted purchases quantity respectively. The inventory at the beginning of the current month will be same as the inventory at the end of the previous month (for example, the inventory at the beginning of the February month will be same as the inventory at the end of the January month which is 4,600 units) and so on. Also, the purchase price is $12 per unit as per the information provided to calculate the dollar amount of purchases budget.

To determine

4.

Introduction:

The cash payments on product purchases is with respect to the policy followed by the management and the credit period allowed by the suppliers of such company.

To calculate:

To calculate the cash payments on product purchases for March and April.

Answer to Problem 7BPSB

Solution:

The table below shows the cash payments on product purchases for March and April:

Particulars	March ($)	April ($)
Cash payments for February product purchases	183,120	0
Cash payments for March product purchases	68,220	159,180
Cash payments for April product purchases	0	69,120
Cash payments on product purchases	251,340	228,300

Explanation of Solution

The cash payments on product purchases for the company is as 30% paid in that month and other 70% is paid in the next month as per the information provided. Therefore, the same concept is applied to calculate the cash payments on product purchases for the given months respectively.

To determine

5.

Introduction:

A cash budget is a budget of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans. In other words, a cash budget is an estimated projection of the company's cash position in the future.

To calculate:

To prepare a cash budget for March and April respectively.

Answer to Problem 7BPSB

Solution:

The table below shows the cash budget for March and April respectively:

Particulars	Reference	Amount ($)
		March	April
Opening Cash Balance		50,000	58,070
Add- Cash Receipts
Cash collections of the credit sales		431,530	425,150
Total Cash Collection	(A)	481.530	483,220
Total Cash Expenses-
Cash payments on product purchases		251,340	228,300
Selling and administrative expenses		160,000	160,000
Interest on loan taken from bank		120	0
Total Cash Expenditure	(B)	411,460	388,300
Net Cash Balance	(A - B)	70,070	94,920
Less- Loan from bank repaid		12,000	0
Closing Cash Balance		58,070	94,920

Explanation of Solution

The cash budget for March and April as calculated above, is explained below:

1. The cash collections of the credit sales of a company is recently experienced as 40% of credit sales is collected in the month of the sale, 35% in the month after the sale, 23% in the second month after the sale and 2% proves to be uncollectible as per the information provided. Therefore, the same concept is applied to calculate the cash collections from the credit sales for the given months respectively.

2. The cash payments on product purchases for the company is as 30% paid in that month and other 70% is paid in the next month as per the information provided. Therefore, the same concept is applied to calculate the cash payments on product purchases for the given months respectively.

3. As per the information provided, the selling and administrative expenses ($1,920,000 divided by 12 months, which is $160,000 per month) of the company are paid in full in the month of its expenditure itself.

4. The outstanding loan from bank of $12,000 is discharged along with interest of $120 at the rate of 12% per annum, at the end of March month respectively. However, as the loan from bank is repaid in full, the company do not have any loan balance outstanding at the end of the month March and April respectively.

Conclusion

Thus, we have calculated a cash budget for March and April as required.

To determine

6.

Introduction:

A cash budget is a budget of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans. In other words, a cash budget is an estimated projection of the company's cash position in the future.

To determine:

To analyze the advantages for the management from a cash budget, in knowing the loan needs in advance for the company.

Answer to Problem 7BPSB

Solution:

The management knowing the loan needs in advance from a cash budget will help the company to reduce the credit period for its customers, avoidance of shortages of cash and arranging the loan requirements.

Explanation of Solution

The advantages for the management from a cash budget, in knowing the loan needs in advance for the company are explained below:

1. Reduce the credit period for its customers- The need for change in account receivables policy of the company may be required by the management. However, if the same period cannot be reduced then subsequently the company may procure necessary loans for liquidity purposes with the help of a cash budget.

2. Avoidance of shortages of cash- The management, with the help of a cash budget, will know the cash shortages for such period and may act proactively to avoid such situation.

3. Arranging the loan requirements- With the help of a cash budget, it will be smart to arrange such short-term loans as per requirements of the company.

Conclusion

Thus, we conclude that the management will be benefited in knowing the loan needs in advance for the company, with the help of a cash budget.