BUDGETING AND PLANNING Iron Creatures Enterprises, a merchandising entity, has p
ID: 2471189 • Letter: B
Question
BUDGETING AND PLANNING
Iron Creatures Enterprises, a merchandising entity, has provided the following budgeted information:
February March April May
Total Sales $100,000 $?????? $?????? $??????
Merchandise Purchases $60,000 $90,000 $120,000 $70,000
Cash sales account for one-fifth of total sales, while the remaining four-fifths are on account. Iron Creatures budgets
for sales of 10,000 units in February. Unit sales projected for March, April, and May are 12,000 (March), 11,000
(April), and 14,000 units (May).
Past experience indicates collections on account are as follows:
• 40% will be collected in the month of sale
• 45% will be collected in the following month
• 10% will be collected in the 2nd month following the sale
• 5% are never collected
Purchases of merchandise inventory are all on credit; 25% is paid in the month of purchase, 50% is paid in the 1st
month after the purchase and 25% in the 2nd month following the purchase.
Other items budgeted include the following:
A) Selling and Administrative Expenses of $70,000 per year, including $10,000 of annual depreciation expense
B) Equipment costing $45,000 will be purchased for cash in April
C) Fixed assets with a cost of $30,000 and accumulated depreciation of $18,000 will be sold in May; a gain of
$5,000 is expected to be realized
D) The company will purchase stock of various other companies in the month of April, paying $20,000 cash
E) Interest on any line of credit loan must be paid monthly
Iron Creatures wishes to maintain a minimum cash balance of $12,000 at the end of each month. The company
borrows money from the bank at 6% interest if necessary to maintain the minimum cash balance. Borrowed money
is repaid in months when there is an excess cash balance. The beginning cash balance on April 1 is projected to be
$12,000. The beginning loan balance on April 1 is projected to be $31,000.
1) Complete the supporting schedules for cash collections from sales and cash payments for merchandise. (6
points)
CASH COLLECTIONS ON SALES (3 points)
Collection Month
Sale Month Feb. March April May June July Never
CASH SALES
April (TOTAL: ___________)
May (TOTAL: ___________)
CREDIT SALES
February (TOTAL: ___________)
March (TOTAL: ___________)
April (TOTAL: ___________)
May (TOTAL: ___________)
TOTAL COLLECTION ON CREDIT
CASH PAYMENTS ON MERCHANDISE PURCHASES (3 points)
Payment Month
Purchase Month Feb. March April May June July Never
CREDIT SALES
February (TOTAL: ___________)
March (TOTAL: ___________)
April (TOTAL: ___________)
May (TOTAL: ___________)
TOTAL PAYMENT ON MERCHANDISE
2) Prepare a cash budget for Iron Creatures Enterprises for the months of April and May. Be sure to indicate the
ending cash balance and ending loan balance for each month. (14 points; each error is a 1-point deduction)
APRIL MAY
Beginning of Month Loan Balance $ ___________________ $ ___________________
-----------------------------------------------------------------------------------------------------------------------------------------------------
Beginning of Month Cash Balance $ ___________________ $ ___________________
Add: Collections from Customers
Cash Sales ___________________ ___________________
Credit Sales ___________________ ___________________
Add: _______________________ ___________________ ___________________
Less: Payment for Merchandise Purchases ___________________ ___________________
Less: _______________________ ___________________ ___________________
Less: _______________________ ___________________ ___________________
Less: _______________________ ___________________ ___________________
Less: _______________________ ___________________ ___________________
Preliminary End of Month Cash Balance ___________________ ___________________
Add: Loan Additions ___________________ ___________________
Less: Loan Payments ___________________ ___________________
End of Month Cash Balance $ ___________________ $ ___________________
-----------------------------------------------------------------------------------------------------------------------------------------------------
End of Month Loan Balance $ ___________________ $ ___________________
Explanation / Answer
Iron Creatures Enterprises All Amounts in $ 1) Cash Collections on Sales Feb Mar Apr May Cash Collections from Sales February 20000 24000 22000 28000 March April May Collections from Credit Sales February 32000 36000 8000 March 38400 43200 9600 April 35200 39600 May 11200 Total Collections from Sales 52000 98400 108400 88400 Cash Payments on Merchandise Purchases Feb Mar Apr May Payments against Merchandise February 15000 30000 15000 March 22500 45000 22500 April 30000 60000 May 17500 Payments for Merchandise 15000 52500 90000 100000 2. Cash Budget for April and May April May Opening Cash Balance at beginning 12000 12000 Opening Loan Balance at beginning 31000 82755 Add : Additional Loan taken 51755 14 Add : Collections from Sales 108400 88400 Add : Sale of Fixed Assets 0 17000 203155 200169 Less : Expenses and Purchases Merchandise Purchases 90000 100000 Selling and Administrative Expense (Net of Depreciation) 5000 5000 Equipment Purchased 45000 Repayment of Loan 82755 Investment in Other Companies 20000 Interest on Loan 155 414 Closing Cash Balance at month end 12000 12000 Closing Loan Balance at month end 82755 14
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