BUDGETING AND PLANNING Iron Creatures Enterprises, a merchandising entity, has p
ID: 2471191 • 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.
CASH COLLECTIONS ON SALES
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 Payment s ___________________ ___________________
End of Month Cash Balance $ ___________________ $ ___________________
-----------------------------------------------------------------------------------------------------------------------------------------------------
End of Month Loan Balance $ ___________________ $
Explanation / Answer
NOTE : 1. Sale of Fixed Asset = Cost - Cumulative Depreciation + Gain
= 30000 - 18000 + 5000
= 17000
2. Selling and Administrative cost is allocated $ 5000 monthly and depreciation is not a cash item son excluded from it.
CASH BUDGET PARTICULARS APRIL MAY Beginning of the Loan Balance 31,000.00 49,000.00 Beginning of the Cash Balance 12,000.00 12,000.00 Add : Collection from Customers Cash Sales 22,000.00 28,000.00 Credit Sales 108,000.00 117,500.00 Add : Sale of Fixed Asset 17,000.00 142,000.00 174,500.00 Less : Payment for Merchandise Purchase 90,000.00 100,000.00 Less : Selling Administrative Expenses 5,000.00 5,000.00 Less : Equipment Purchase 45,000.00 Less : Stock Purchase 20,000.00 Less : Interest Payment 4,800.00 160,000.00 109,800.00 Preliminary End of the Month Balance (6,000.00) 76,700.00 Add : Loan Addition 18,000.00 Less : Loan Repayment - 49,000.00 End of the Month Cash Balance 12,000.00 27,700.00 End of the Month Loan Balance 49,000.00 -Related Questions
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