Westex Products is a wholesale distributor of industrial cleansing products. Whe

Question

Westex Products is a wholesale distributor of industrial cleansing products. When the treasurer of Westex Products approached the company's bank late in the current year seeking short term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed record of cash collections and dispersements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which repayments could be made.

Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:

a. Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are:

Sales Merchandise Purchases

Current year:

Fourth quarter actual.......... $200,000 $126,000

Next year:

First quarter estimated.......... $300,000 $186,000

Second quarter estimated.......... $400,000 $246,000

Third quarter estimated.......... $500,000 $305,000

Fourth quarter estimated........ $200,000 $126,000

b. All sales are on account (2% uncollectable). The company normally collects 65% of a quarters sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectable. This pattern of collection is now being experimented in the current years fourth quarter actual data

c. Eighty percent of a quarters perchandise purchases are paid for withinthe quarter. Theremainder is paid for in the following quarter.

d. Selling and administrative expenses for next year are budgeted for $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is depreciation.

e. The company will play $10,000 in dividends each quarter.

f. Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be cash.

g. The cash account contained $10,000 in dividends each quarter.

h. The company has an aggreement with the local bank that allows the company to borrow in incrementals of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans in 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus the acumulated interest at the end of the year.

i. At present the company has no loans outstanding.

Required:

1. Prepare the following by quarter and in total for next year:

a. A schedule of expected cash collections.

b. A schedule of expected cas disbursements for merchandise purchases.

2. Compute the expected cash disbursements for selling and admisistrative expenses, by quarter and in total, for next year.

3. Prepare a cash budget, by quarter and in total, for next year.

Do only quarters one and two

Explanation / Answer

Part 1)

a)

The schedule of expected collections is given as below:

_________

b)

The schedule of expected cash disbursements is given as below:

_________

Part 2)

The expected cash disbursements for selling and administrative expenses is calculated as follows:

_________

Part 3)

The cash budget is given below:

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Year Cash Sales (65% of the Sales) 195,000 (300,000*65%) 260,000 (400,000*65%) 325,000 (500,000*65%) 130,000 (200,000*65%) 910,000 Collections from Accounts receivables 66,000 (200,000*33%) 99,000 (300,000*33%) 132,000 (400,000*33%) 165,000 (500,000*33%) 462,000 Total Collections $261,000 $359,000 $457,000 $295,000 $1,372,000

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