SAMPLE PROBLEM

The July 31, 2010, balance sheet for World Windows Inc. includes the following information:

Cash P40, 000 debit

Accounts Receivable P270, 000 debit

Merchandise Inventory A 8750 debit

Merchandise Inventory B 7200 debit

The firm’s management has designated P35, 000 as the firm’s monthly minimum cash balance. Because a piece of
equipment was sold at the end of July, the beginning cash balance was greater than the minimum desired amount.
Other information about World Windows is as follows:

 Projected sales (all on account) for the following three months are:

Inventory selling price August September October

A P250 1,OOO units 800 units 1100 units
B P480 500 units 700 units 1300 units

• Cost of Goods Sold (CGS) for A and B approximates 70 and 60 percent, respectively, of sales revenues.

• Management wants to end each month with units costing the equivalent of 5 percent of the following month’s sales
in units. Unit costs are assumed to be stable.

• The collection pattern for accounts receivable is 55 percent in the month of sale,

44 percent in the month following the sale, and 1 percent uncollectible.

• All accounts payable for inventory are paid in the month of purchase.

• Other monthly expenses are P28, 000, which includes P6, 000 of depreciation but does not include uncollectible
accounts expense.

• Investments of excess cash are made in P5, 000 increments.

REQUIRED:

A. Prepare a sales budget for August, September, and October.

B. Prepare a purchase budget for August and September.
C. Prepare the cash budget for August including the effect of financing (borrowing or investing).