Author Question: Cash budgeting. On December 1, 2014, the Iaia Wholesale Co. is attempting to project cash ... (Read 74 times)

Sportsfan2111 · **on:** Jul 6, 2018

Cash budgeting.

On December 1, 2014, the Iaia Wholesale Co. is attempting to project cash receipts and disbursements through January 31, 2015. On this latter date, a note will be payable in the amount of 107,000. This amount was borrowed in September to carry the company through the seasonal peak in November and December.
Selected general ledger balances on December 1 are:

Sales terms call for a 3 discount if payment is made within the first 10 days of the month after sale, with the balance due by the end of the month after sale. Experience has shown that 50 of the billings will be collected within the discount period, 30 by the end of the month after purchase, and 15 in the following month. The remaining 5 will be uncollectible. There are no cash sales.
The average selling price of the company's products is 170 per unit. Actual and projected sales are:

All purchases are payable within 15 days. Approximately 60 of the purchases in a month are paid that month and the rest the following month. The average unit purchase cost is 130. Target ending inventories are 570 units plus 20 of the next month's unit sales.
Total budgeted marketing, distribution, and customer-service costs for the year are 670,000. Of this amount, 155,000 are considered fixed (and include depreciation of 43,400). The remainder varies with sales. Both fixed and variable marketing, distribution, and customer-service costs are paid as incurred.

Required:
1. Prepare a cash budget for December 2014 and January 2015. Supply supporting schedules for collections of receivables; payments for merchandise; and marketing, distribution, and customer-service costs.
2. Why do Iaia's managers prepare a cash budget in addition to the operating income budget?

Question 2

The General Journal report is located under _____________ in QuickBooks.
a. Company & Financial
b. Accountant & Taxes
c. Custom Reports
d. None of the above

GCabra · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

Iaia Wholesale Co.
Statement of Budgeted Cash Receipts and Disbursements
For the Months of December 2014 and January 2015

December 2014 January 2015
Cash balance, beginning 30,000 4,835
Add receipts:
Collections of receivables (Schedule 1) 503,835 559,470
(a) Total cash available for needs 533,835 564,305
Deduct disbursements:
For merchandise purchases (Schedule 2) 429,940 465,400
For variable costs (Schedule 3) 89,760 97,920
For fixed costs (Schedule 3) 9,300 9,300
(b) Total disbursements 529,000 572,620
Cash balance, end of month (a b) 4,835 (8,315)

Under the current projections, the cash balance as of January 31, 2015, is (8,315), which is not sufficient to enable repayment of the 107,000 note.

Schedule 1: Collections of Receivables

Collections in Oct. Sales Nov. Sales Dec. Sales Jan. Sales Total

December 2014 43,050a 188,700b 272,085c ---- 503,835

January 2015 94,350d 168,300e 296,820f 559,470

a0.15 287,000 b0.30 629,000 c0.50 561,000 0.97
d0.15 629,000 e0.30 561,000 f0.50 612,000 0.97

Schedule 2: Payments for Merchandise
December January
Target ending inventory (in units) 1,290a 1,170c
Add units sold (sales 170) 3,300 3,600
Total requirements 4,590 4,770
Deduct beginning inventory (in units) 860b 1,290
Purchases (in units) 3,730 3,480
Purchases in dollars (units 130) 484,900 452,400

December January
Cash disbursements:
For December: accounts payable on Dec. 1, 2014; 139,000
60 of current month's purchases 290,940 271,440
For January: 40 of December's purchases ________ 193,960
429,940 465,400

a570 units + 0.20 (612,000 170)
b111,800 130
c570 units + 0.20(510,000 170)

Schedule 3: Marketing, Distribution, and Customer-Service Costs

Total annual fixed costs, 155,000, minus 43,400 depreciation 111,600
Monthly fixed cost requiring cash outlay 9,300
Variable cost ratio to sales = = 0.16
December variable costs: 0.16 561,000 sales 89,760
January variable costs: 0.16 612,000 sales 97,920

2. Iaia's managers prepare a cash budget in addition to the operating income budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay operating expenses as these payments come due. Iaia could be very profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be delayed and result in insufficient cash being available to make scheduled payments for its expenses. Iaia's managers may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be available, so Iaia's managers need to prepare a cash budget in addition to an operating income budget. For example, the cash budget helps Iaia's managers recognize that Iaia will not be able to repay the note in the amount of 107,000 when it comes due on January 15, 2015. The cash budget prompts Iaia's managers to start making other arrangements for this loan, either by extending its terms or borrowing cash from elsewhere to pay it back.

Answer to Question 2

b