Saturn Limited has been in operation for several months but found that, at critical times, it had

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Question:

Saturn Limited has been in operation for several months but found that, at critical times, it had difficulty coping with a shortage of cash. On August 31, Saturn commissioned you to prepare a cash budget. The following data were gathered:

i. Approximately 20% of all sales is for cash. Eighty per cent of credit customers pay the month after sales, while 20% pay two months after.

ii. All purchases are on credit, 60% is paid in the month after purchase and 40% is paid two months afterwards.

iii. Old machinery will be sold for $3,000 in September. New equipment, at a value of $200,000 will be purchased in October, with 50% of the cost price to be paid in the month of purchase, and the balance in equal monthly instalments over the next four months.

iv. A full year’s depreciation, at a rate of 10% per annum, will be charged on December 31.

v. Utilities are expected to be $20,000 for September and are expected to increase by 10% each month.

vi. A loan of $250,000 will be obtained in October at an annual interest rate 12%. No principal will be repaid until 2015 January. Interest, however, will be paid on a monthly basis, starting October.

vii. Fifty per cent of salaries and general expenses are normally paid in the month incurred, with the remainder being paid the following month.

viii. Amounts for July and August, as well as projected figures for September to December are:

Months	Sales $	Purchases $	Salaries $	General expenses $
July	80,000	60,000	40,000	32,000
August	90,000	75,000	40,000	44,000
September	120,000	95,000	50,000	42,000
October	130,000	100,000	50,000	50,000
November	140,000	105,000	55,000	54,000
December	160,000	110,000	55,000	56,000