UNIVERSITY OF THE WEST INDIES

Mona School of Business & Management

ACCT 1003 - INTRO. TO COST & MANAGEMENT ACCOUNTING

Worksheet #8 - Budgets

Lecture/Tutorial Questions

Question 1
Romeo Lindo, the management accountant at “Woods Household Supplies” is in the
process of planning the company’s cash needs for the last quarter of 2016. Extracts
from the sales and purchases budgets are as follows:
Month Cash Sales Purchases
2016 Sales On On
Account Account
August $71,000 $520,000 $420,000
September $55,500 $640,000 $400,000
October $38,400 $760,000 $520,000
November $36,500 $680,000 $440,000
December $56,750 $850,000 $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:
50% in the month of sale
40% in the first month following the sale
10% in the second month following the sale

(ii) Accounts payable are settled as follows, in accordance with the credit terms
5/30, n60:
75% in the month in which the inventory is purchased
25% in the following month

(iii) In the month of November, an old motor vehicle, with net book value of
$95,000, will be sold for cash to an employee at a profit of $45,000. The
employee will be allowed to pay a deposit equal to 50% of the amount in
November and the balance will be settled in two equal amounts in December
2016 and January 2017.
(iv) Furniture and Fixtures, which is estimated to cost $240,750, will be purchased
for cash in December.
(v) A money market instrument purchased by Woods Household Supplies with a
face value of $500,000 will mature on October 20, 2016. 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 6% per annum is also expected to be collected.

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(vi) The manager of Woods Household Supplies has negotiated with a tenant for
rental of storage space to him beginning October 2016. The rental is $864,000
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 is
expected to be received at the beginning of each month.
(vii) Fixed operating expenses which accrue evenly throughout the year, are
estimated to be $2,016,000 per annum are settled monthly. Monthly
depreciation expenses of non-current assets amounting to $56,000 are
included in these costs.

(viii) Other operating expenses are expected to be $168,000 per quarter and are
settled monthly.

(ix) Wages and salaries are expected to be $2,916,000 per annum and will be paid
monthly.

(x) At the recently concluded negotiations between management and the union
representing the workers it was agreed that the business should make
retroactive payments in the amount of $1,140,000 to employees. The payment
is being settled in four equal tranches. The third payment becomes due and
payable in October of 2016.

(xi) The cash balance on September 30, 2016 is expected to be an overdraft of

$175,000

Required:

(a) Prepare a schedule of budgeted cash collections for sales on account for each of
the months October to December, 2016.

(b) Prepare a schedule of expected cash disbursements for purchases for the
quarter to December 31, 2016.

(c) Prepare a cash budget, with a total column, for the quarter ending December
31, 2016, showing the receipts and payments for each month.

(d) Companies in the industry in which Woods Household Supplies operates are
required to maintain a minimum cash balance of $145,000 each month. Based
on the budget prepared, will the business be meeting this requirement?
Suggest three (3) possible steps (other than borrowing), that may be taken by
the management of Woods Household Supplies to improve the organization’s
cash flow.

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 Question 2
Marie Marx, the management accountant at “Go Jamdown” is in the process of
planning the company’s cash needs for the third quarter of 2008. She has received
the following information to assist in the preparation of the cash budget for the
business.
Month Cash Sales Credit Sales Purchases Selling
Expenses
May $140,000 $500,000 $0
June $160,000 $600,000 $600,000
July $180,000 $700,000 $675,000 $ 75,000
August $156,000 $580,000 $575,000 $105,000
September $160,000 $600,000 $600,000 $ 85,000
The following additional information is also available:
i) An analysis of the records show that the collection of accounts receivable are
settled, according to the following pattern, in accordance with the credit
terms 10/30, n90:
R o 50% collected in the month of sale
o 40% collected in the month following sale
o 10% collected two months following sale
ii) Eighty percent (80%) of monthly purchases is paid in the month of purchase &
P the remaining 20% will be paid two months following the purchase. The credit
terms of the suppliers is 5/30, n90.
P
SP= iii) During the month of August, a motor vehicle costing $120,000 will be
80000-10000 purchased and paid for in cash. At the same time, an old motor vehicle, which
=70000 has a net book value of $80,000, will be disposed of at a loss of $10,000. R
iv) Interest on investments in other companies amounting to $65,000 is expected
to be collected in August 2008. R
100000
-20000 v) Administrative expenses are expected to be $1,200,000 per annum, and will
=80000 include depreciation expense of $20,000 per month. P
vi) Selling expenses and administrative expenses are paid in the month incurred. P

vii) Taxation of $125,000 has to be settled in September P

viii) Monthly rental is received from a tenant for factory space leased by Go
96000/12 Jamdown. The rental is $96,000 per annum and is received in the month that
=8000 it is earned. R

ix) The cash balance on July 1, 2008 is expected to be an overdraft of $53,000.

Required:
(a) Prepare a debtors collection schedule for the quarter July to September.

(b) Prepare a schedule of expected cash disbursements for purchases for each of
the month July to September.
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(c) Prepare a cash budget, with a total column, for the quarter ending September 30.

(d) Given that the company is required to maintain a minimum cash balance of
$50,000, advise management as to three steps which may be taken to achieve
the desired objective.

Practice Question
(The following question is to be used for self study session)
The management accountant at Fuller Manufacturing Company, Dean Witter, is in
the process of preparing the cash budget for the business for the quarter ending
September 30, 2010. Extracts from the sales and purchases budgets are as follows:

Cash Sales on Purchases on

Month Sales Account Account
May $45,000 $480,000 $390,000
June $60,000 $600,000 $360,000
July $38,000 $720,000 $450,000
August $47,000 $640,000 $400,000
September $51,000 $800,000 $500,000

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 5/30, n90:

60% in the month of sale

20% in the first month following the sale
15% in the second month following the sale
The remaining 5% is expected to be uncollectible.

ii) Accounts payable are settled as follows:

70% in the month in which the inventory is purchased
30% in the following month
The credit terms of the suppliers - 10/30, n60.

iii) A motor vehicle costing $350,000 will be purchased and paid for in September
2010. At the same time, an old motor vehicle, which has a net book value of
$80,000, will be disposed of at a profit of $60,000.

iv) A money market instrument purchased by the company with a face value of
$500,000 will mature on July 15, 2010. On that date quarterly interest
computed at a rate of 20% per annum will also be collected.

v) Fixed operating expenses which accrue evenly throughout the year, are
estimated to be $1,500,000 per annum, [including depreciation on non-current
assets of $30,000 per month] and is settled monthly.

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 vi) Other operating expenses are expected to be $96,000 per quarter and are settled
monthly.

vii) Wages and salaries are expected to be $2,160,000 per annum and will be paid
monthly.

viii) The business has made arrangements with their bankers for a loan of
$240,000. The loan is expected to be disbursed in July 2010.

ix) Retooling of the production facility at the end of 2009 required new equipment
costing $1,500,000 and is being paid for as follows:

January 2010 $200 000

April 2010 $500 000
July 2010 $450 000
October 2010 $350 000

x) The cash balance on June 30, 2010 is expected to be an overdraft of $190,000

Required:

(a) Prepare a schedule of budgeted cash collections for sales for each of the
months July to September.
(b) Prepare a schedule of expected cash disbursements for purchases for the
quarter to September 30, 2010.
(c) Prepare a cash budget, with a total column, for the quarter ending September
30, 2010, showing the receipts and payments for each month.
(d) Given that companies in the industry in which Fuller Manufacturing operates
are required to maintain a minimum cash balance of $100,000 each month,
advice the management of the company as to two (2) possible steps that may be
taken to satisfy this requirement.

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