Evercise 19,5: Paul Sousa is the proprietor of Southerm Stationery and has suppl

Question

Evercise 19,5: Paul Sousa is the proprietor of Southerm Stationery and has supplied the follou information about his business: On 1 July 2005 the balance of the bank account was $3 400 Revenue over the last two months was as follows May June Cash sales $24 000 Credit sales $12 000 -Cash sales $28 000 -Credit sales $10 000 During July all sales are expected to be 8% higher than the June sales figures. Based on the past expe rience of the business, 60% of credit customers pay in the month after sale, with the other 40% pay ing in the second month after sale. The shop had the following purchases during June: Cash $6 000 Credit $16 000 During July, Paul expects to have cash purchases of $7 000 and credit purchases of $14 000. It is the firm's policy to pay all creditors in the month following the purchase of goods. The business has the following regular payments each month: Wages Drawings Loan repayments Cleaning of premises $1 700 $3 200 $3 000 $2 200 $500 The firm pays its annual insurance premium of $3 400 in two instalments, one being due on 16 January and the other on 16 July each year. Paul has also decided to renovate the shop and must make a payment of $8 000 to the builder on 31 July 2005 and another payment of $6 000 on 31 August 2005, when the job should be finished. a Prepare a cash budget for Southern Stationery for the month of July 2005. b Comment on the firm's cash position, given the second payment for the renovations is due in August 2005.

Explanation / Answer

The firm needs additional cash for renovation of the building at the end of the August month which is currently unavailable with firm at the end of the July month. Hence the payment capacity of the balance amount is totally depended upon the August month sales. If the firm will not make good sales as earlier, it will not be able to repay the balance renovation expenses.

CASH BUDGET FOR THE MONTH JULY 2005 PARTICULARS AMOUNT AMOUNT Beginning Cash Balance $3,400 Add: Cash Receipts            Cash Sales in July ($28,000 x 1.08) $30,240            Cash Receipt May Sale ($12,000 x 40%) $4,800            Cash Receipts June Sale ($10,000 x 60%) $6,000 Total Cash Receipts $41,040 Less: Cash Payments            Cash Purchase in July $7,000            Cash Payment June Sale $16,000            Advertising Expense $1,700            Wages $3,200            Drawing $3,000            Loan repayments $2,200            Cleaning of Premises $500            Insurance Expense ($3,400 / 2) $1,700            Renovation Expense $8,000 Total Cash Payments $43,300 Ending Cash Balance $1,140

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