Question

On December 1, 2012, the Itallem Wholesale Co. is attempting to project cash receipts and disbursements through January 31, 2013. On this latter date, a note will be payable in the amount of $ 106,000. This amount was borrowed in September to carry the company through the seasonal peak in November and December.
Selected general ledger balances on December 1 are:
Cash .................. $ 99,000
Inventory ................ 102,000
Accounts payable ............ 86,000
Sales terms call for a 3% discount if payment is made within the first 10 days of the month after sale, with the balance due by the end of the month after sale. Experience has shown that 40% of the billings will be collected within the discount period, 25% by the end of the month after purchase, and 20% in the following month. The remaining 15% will be uncollectible. There are no cash sales.
The average selling price of the company’s products is $ 160 per unit. Actual and projected sales are:
October actual............... $ 286,000
November actual............... 560,000
December estimated ............. 512,000
January estimated ............... 560,000
February estimated .......... .... 304,000
Total estimated for year ending June 30, 2013 .... $ 3,040,000

All purchases are payable within 15 days. Approximately 60% of the purchases in a month are paid that month, and the rest the following month. The average unit purchase cost is $ 120. Target ending inventories are 560 units plus 15% of the next month’s unit sales.
Total budgeted marketing, distribution, and customer- service costs for the year are $ 660,000. Of this amount, $ 150,000 are considered fixed (and include depreciation of $ 39,600). The remainder varies with sales. Both fixed and variable marketing, distribution, and customer- service costs are paid as incurred.

Required
1. Prepare a cash budget for December 2012 and January 2013. Supply supporting schedules for collections of receivables; payments for merchandise; and marketing, distribution, and customer- service costs.
2. Why do Itallem’s managers prepare a cash budget in addition to the operating income budget?



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  • CreatedJanuary 15, 2015
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