Bernard Creighton is the controller for Creighton Hardware Store. In putting tog

Question

Bernard Creighton is the controller for Creighton Hardware Store. In putting together the cash budget for the fourth quarter of the year, he has assembled the following data:
a. Sales
July (actual) ....... $100,000
August (actual) ..... 120,000
September (estimated) .. 90,000
October (estimated) ... 100,000
November (estimated) .. 135,000
December (estimated) .. 150,000
b. Each month, 20 percent of sales are for cash, and 80 percent are on credit. The collection pattern for credit sales is 20 percent in the month of sale, 50 percent in the following month, and 30 percent in the second month following the sale.
c. Each month, the ending inventory exactly equals 40 percent of the cost of next month’s sales. The markup on goods is 33.33 percent of cost.
d. Inventory purchases are paid for in the month following purchase.
e. Recurring monthly expenses are as follows:
Salaries and wages ........... $10,000
Depreciation on plant and equipment .... 4,000
Utilities ................. 1,000
Other .................. 1,700
f. Property taxes of $15,000 are due and payable on September 15.
g. Advertising fees of $6,000 must be paid on October 20.
h. A lease on a new storage facility is scheduled to begin on November 2. Monthly payments are $5,000.
i. The company has a policy to maintain a minimum cash balance of $10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of the month. The annual interest rate is 9 percent. The company must borrow in multiples of $1,000.
j. A partially completed balance sheet as of August 31 follows. (Accounts payable is for inventory purchases only.)

Required:
1. Complete the balance sheet given in part (j).
2. Bernard wants to see how the company is doing prior to starting the month of December. Prepare a cash budget for the months of September, October, and November and for the three-month period in total (the period begins on September 1). Provide a supporting schedule of cash collections.
3. Prepare a pro forma balance sheet as of November30.

Explanation / Answer

The problem contains lots of informations. Use the figures given to ascertain Balance sheet of August and November, and Cash balance of September to November. First consider the calculations made in the table below:

Note:

1. First consider sales. Sale of a month is 20% is cash. So it is collected in the same month. Out of 80% credit sale 20% (i.e 80%x20%=16% of total month sale) is collected in the same month. 50% of 80% credit sale (i.e. 40% of monthly total sale) is collected in next month. Balance in the following month. Detailed workings of such collection has been shown in point 2 above.

2. 33.33% (i.e. 1/3 rd) of cost is gross profit. So it is 25% (or 1/4th) of sales. It is shown in point 4. Deduct it from sales of point 1. to get COGS.

3. 40% of next months sales requirement (i.e. COGS of next month) is ending inventory. So 40% is multiplied with next month COGS to get end inventory of a month. It is shown in point 5 above.

4. Purchase requirement of a month is COGs of the month plus end inventory minus begining inventory. It is shown in point 7. This purchase figure of a month is paid in the next month. So in the month it will appear in balance sheet as Accouts payable.

5. Other expenses are shown in the table are payable in the same month. However nothing is payable for depreciation.

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1. Based on above workings incomplete Balance sheet of August has been completed. It is shown below:

In the Balance sheet some missing figures are filled up. They are as follows:

1. Cash balance is taken from Cash balance calculated in next part of the problem.

2. Acounts receivables break up is shown in the workings above. Link it with first table of calculation to get full idea.

3. Ending Inventory figure is available from point 5 of first table of workings.

4. Accouts payable of August is total purchase of July.

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Answer of point (2)

Now you have to prepare cash flow statement for September to November. It is ascertain by using following steps:

1. Consider total cash receipt of the month. It is the sum of sales collection and loa taken if any.

2. The consider total paymets of the month. It includes payment of interest and loan repayment. As per problem minimum cash balance should e at least 10,000. If not then take loan in multiples of $1,000.Take it at the begining of the month. Repay it at the end of the month with interrst. Only loan has been taken i October and also repaid on the same month.

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Answer of part (3):

finally use all the calculations above to draw Balance sheet of November. It is shown below:

Working table: July August September October November December (Actual) (Actual) Projected Projected Projected Projected 1. sales $100,000.00 $120,000.00 $90,000.00 $100,000.00 $135,000.00 $150,000.00 2. Collection:     In cash 20% (month of sale) $20,000.00 $24,000.00 $18,000.00 $20,000.00 $27,000.00 $30,000.00 Credit 20% of 80% (month of sale) $16,000.00 $19,200.00 $14,400.00 $16,000.00 $21,600.00 $24,000.00 Credit 50% of 80% (Next month of sale) $40,000.00 $48,000.00 $36,000.00 $40,000.00 $54,000.00 Credit 30% of 80%(next 2 month) $24,000.00 $28,800.00 $21,600.00 $24,000.00 3. Gross profit (i/3 of cost=1/4 of sales) $25,000.00 $30,000.00 $22,500.00 $25,000.00 $33,750.00 $37,500.00 4.COGS [1-3] $75,000.00 $90,000.00 $67,500.00 $75,000.00 $101,250.00 $112,500.00 5. Ending Inventory (40% of next month) $36,000.00 $27,000.00 $30,000.00 $40,500.00 $45,000.00 6. Beginning Inventory $36,000.00 $27,000.00 $30,000.00 $40,500.00 $45,000.00 7. Purchase of the month [4+5-6] $111,000.00 $81,000.00 $70,500.00 $85,500.00 $105,750.00 $67,500.00 8. Payment for purchase [next month] $111,000.00 $81,000.00 $70,500.00 $85,500.00 $105,750.00 9. Recurring monthly expenses:      Salary and wages $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00      Depreciation Plant & Machine $4,000.00 $4,000.00 $4,000.00 $4,000.00 $4,000.00      utilities $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00     Others $1,700.00 $1,700.00 $1,700.00 $1,700.00 $1,700.00      Total $16,700.00 $16,700.00 $16,700.00 $16,700.00 $16,700.00 10. Property tax (Payable o 15th Sept) $15,000.00 11. Advertising fees (October 20) $6,000.00 12. Lease rent 9Payable from Nov2nd) $5,000.00 $5,000.00

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