16 Question 5 M04 OMB Ltd. \'s September balance sheet contains the following in

Question

16 Question 5 M04 OMB Ltd. 's September balance sheet contains the following information: Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory $30,000 (dr) 100,800 (dr) 2,240 (cr) 21,000 (dr) Management has designated $30,000 as the firm's minimum monthly cash balance. Other information about the firm and its operations is as follows: 1. Sales revenues of $280,000, $336,000, and $250,000 are expected for October, November, and December, respectively. All goods are sold on account. The collection pattern for accounts receivable is 55% in the month of sale, 44% in the month following the month of sale, and 1% uncollectible, which is set up as an allowance 2, 3, Cost ofgoods sold is 60% ofsales revenues. Management's target ending balance of merchandise inventory is 10% of the current month's sales. 4. 5. All accounts payable for inventory ae paid in the month of purchase. 6. Other monthly expenses are $37,800, which includes $2,800 of amortization but does not include bad debl expense. 7. Borrowings and investments can only be made in $5,000 increments at the end of a month. Interest is charged at the rate of 10% per year, interest will be earned at the rate of 8% per year Required a. Prepare a cost of purchases schedule for October and November. b. Prepare the cash budgets for October and November including the effects of financing 6 10 (borrowing or investing).

Explanation / Answer

1) Cost of purchase Schedule October November Sales revenue 280000 336000 Cost of goods sold 168000 201600 (280000*60%) (336000*60%) (+) Ending inventory (10% of sales) 28000 33600 (+) Beginnig inventory 21000 28000 Cost of purchase 175000 207200 (168000+28000-21000) (201600+33600-28000) 2) OMB Ltd Cash Budget For the month of October and November October November Beginning cash balance 30000 32560 Receipts: Collection from customers 252560 308000 (100800-2240)+(280000*55%) (280000*44%)+(336000*55%) Total cash available 282560 340560 Disbursements: Payment to supplies 175000 207200 Other expenses 35000 35000 (37800-2800) (37800-2800) Total Disbursements 210000 242200 Cash excess / (shortage) over disbursements 72560 98360 Financing: Borrowing 0 0 Investing -40000 -65000 (72560-30000-2560) (95800-30000-3860) Ending cash balance 32560 33360

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