PROBLEM 8-26 Cash Budget with Supporting Schedules (LO2 L04, L07. LO Westex Prod

Question

PROBLEM 8-26 Cash Budget with Supporting Schedules (LO2 L04, L07. LO Westex Products is a wholesale distributor of industrial cleaning 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 wery tight and that any borowing over the nest year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very heipful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed and 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 cument year, are Cument Year Fourth quarter actual.... 200,000 $126.000 First quarter estimated $300,000 $186,000 $200.000 126,000 b. All sales are on account. The company normaly collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder is uncolectible. This patem of collections is now being experienced in the cument year's ur quarter actual data c. Eighty percent of a quarter's merchandise purchases are paid for within the quarter. The remainder is paid for in the following quater d. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is depreciation e. The company will pay $10,000 in dividends each quater L Land purchases of $75.000 wil be made inthe second quarter, d purchases of $48,000 will be made in the third quater These purchases will be for cash The Cash account contained $10.000 at the end of tec net year The treasurer feels that this represents a minimum balance that must be maintained g· h. The company has an agreement with a local bank that alows the company to borrow in increments of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on thes* loans is 25% per quarter and for srpkty we wil assume that interest is not compounded. The company would, as far as it is able repay the loan plus accumulated interest at the end ot the year L At present, the company has no loans outstanding Page 387 Prepare the following by quarter and in total for mext year a A schedule of expected cash collections. b. A schedule of expected cash disbursements for merchandise 2. Compute the expected cash disbursements for selling and administrative expenses, by quarter and in total for nest year 3. Prepare a cash budget, by quarter and in total for next year

Explanation / Answer

Requirement 1-a) Schedule of expected cash collections 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Sales Revenue 300000 400000 500000 200000 1400000 Collection from Current quarter 195000 260000 325000 130000 910000 Previous quarter 66000 99000 132000 165000 462000 Total expected cash collections 261000 359000 457000 295000 1372000 Requirement 1-b) Schdeule of expected cash disbursement for merchandise purchase 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Merchandise purchase Value 186000 246000 305000 126000 863000 Payment for Current quarter 148800 196800 244000 100800 690400 Previous quarter 25200 37200 49200 61000 172600 Total expected cash disbursement for purchase 174000 234000 293200 161800 863000 Requirement 2 Computation of expected cash disbursement for selling and administrative expenses 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Selling and administrative expenses A Variable 45000 60000 75000 30000 210000 Fixed 50000 50000 50000 50000 200000 Less : Depreciation 20000 20000 20000 20000 80000 B Total 30000 30000 30000 30000 120000 Total selling & administrative expenses 75000 90000 105000 60000 330000 (A+B) Requirement 3 Cash Budget 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Beginning cash Balance 10000 12000 10000 10800 10000 Cash collection 261000 359000 457000 295000 1372000 Total cash 271000 371000 467000 305800 1382000 Less : Payment For Merchandise purchase 174000 234000 293200 161800 863000 For selling & administrative expenses 75000 90000 105000 60000 330000 For Land 75000 48000 123000 For dividend 10000 10000 10000 10000 40000 Total Payment 259000 409000 456200 231800 1356000 Surplus(deficiency) 12000 -38000 10800 74000 26000 Borrowing 0 48000 0 Interest 0 1200 1200 1200 3600 Repayment of Loan and Interest 0 51600 Ending cash balance 12000 10000 10800 22400 22400

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