The management accountant at Miller Merchandising Company, Odail Russell is in the process of preparing the...

 

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The management accountant at Miller Merchandising Company, Odail Russell is in the process of preparing the cash budget for the business for the fourth quarter of 2019. It is customary for the business to borrow money during this quarter. Extracts from the sales and purchases budgets are as follows: i) ii) Month August September October November December iii) iv) v) Cash Sales $85,000 Sales On Account $640,000 $70,000 $550,000 $600,000 $800,000 $500,000 $62,250 $72,800 $77,600 Purchases On Account $420,000 $550.000 $500,000 $600,000 $450,000 An analysis of the records shows that accounts receivable are settled according to the following credit pattern, in accordance with the credit ferms 4/30, n90. 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale All purchases are on account & accounts payable are settled as follows, in accordance with the credit terms-2/30, n60: 60% in the month in which the inventory is purchased 40% in the following month Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,680,000 per annum, (including depreciation on non-current assets of $420,000 per annum) and is settled monthly. Wages and salaries are expected to be $2,280,000 per annum and will be paid monthly. Other operating expenses are expected to be $108,000 per quarter and will be settled monthly. vi) In the month of November, an old motor vehicle, which cost $650,000, will be sold to an employee at a gain of $30,000. Accumulated depreciation on the motor vehicle at that time is expected to be $540,000. The employee will be allowed to pay a deposit equal to 60% of the selling price in November and the balance settled in two equal amounts in December 2019 & January of 2020. vii) Computer equipment, which is estimated to cost $320,000, will be acquired in November. The manager has made arrangements with the seller to make a cash deposit of 50% of the amount upon signing of the agreement in November, with the balance to be settled in four equal monthly instalments, starting in December 2019 viii) The management of Miller Merchandising Company has negotiated with a tenant to rent office space to her beginning November 1. The rental is $624,000 per annum. The first month's rent along with one month's safety deposit is expected to be collected on November 1. Thereafter, monthly rental income becomes due at the beginning of each month. Taxation of $85,000 has to be settled in December. A money market instrument purchased by the company with a face value of $300,000 will mature on October 15, 2019. In order to meet the financial obligations of the business, management has decided to liquidate the investment upon maturity. On that date quarterly interest computed at a rate of 5% per annum is also expected to be collected. xi) The cash balance at September 30, 2019 is expected to be an overdraft of $135,000. ix) Required: (a) Prepare a schedule of budgeted cash collections for sales on account for each of the months October to December. (b) Prepare a schedule of expected cash disbursements for purchases on account for each of the months October to December. (c) Prepare a cash budget, with a total column, for the quarter ending December 31, 2019, showing the expected cash receipts and payments for each month and the ending balance before financing for each of the month (d) Companies in the industry in which Miller Merchandising Company operates are required to maintain a minimum cash balance of $120,000 each month. Based on the budget prepared, will the business be meeting this requirement? Suggest four (4) possible steps (other than borrowing) that may be taken by Miller to improve the cash flow of the business and hence satisfy this requirement. The management accountant at Miller Merchandising Company, Odail Russell is in the process of preparing the cash budget for the business for the fourth quarter of 2019. It is customary for the business to borrow money during this quarter. Extracts from the sales and purchases budgets are as follows: i) ii) Month August September October November December iii) iv) v) Cash Sales $85,000 Sales On Account $640,000 $70,000 $550,000 $600,000 $800,000 $500,000 $62,250 $72,800 $77,600 Purchases On Account $420,000 $550.000 $500,000 $600,000 $450,000 An analysis of the records shows that accounts receivable are settled according to the following credit pattern, in accordance with the credit ferms 4/30, n90. 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale All purchases are on account & accounts payable are settled as follows, in accordance with the credit terms-2/30, n60: 60% in the month in which the inventory is purchased 40% in the following month Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,680,000 per annum, (including depreciation on non-current assets of $420,000 per annum) and is settled monthly. Wages and salaries are expected to be $2,280,000 per annum and will be paid monthly. Other operating expenses are expected to be $108,000 per quarter and will be settled monthly. vi) In the month of November, an old motor vehicle, which cost $650,000, will be sold to an employee at a gain of $30,000. Accumulated depreciation on the motor vehicle at that time is expected to be $540,000. The employee will be allowed to pay a deposit equal to 60% of the selling price in November and the balance settled in two equal amounts in December 2019 & January of 2020. vii) Computer equipment, which is estimated to cost $320,000, will be acquired in November. The manager has made arrangements with the seller to make a cash deposit of 50% of the amount upon signing of the agreement in November, with the balance to be settled in four equal monthly instalments, starting in December 2019 viii) The management of Miller Merchandising Company has negotiated with a tenant to rent office space to her beginning November 1. The rental is $624,000 per annum. The first month's rent along with one month's safety deposit is expected to be collected on November 1. Thereafter, monthly rental income becomes due at the beginning of each month. Taxation of $85,000 has to be settled in December. A money market instrument purchased by the company with a face value of $300,000 will mature on October 15, 2019. In order to meet the financial obligations of the business, management has decided to liquidate the investment upon maturity. On that date quarterly interest computed at a rate of 5% per annum is also expected to be collected. xi) The cash balance at September 30, 2019 is expected to be an overdraft of $135,000. ix) Required: (a) Prepare a schedule of budgeted cash collections for sales on account for each of the months October to December. (b) Prepare a schedule of expected cash disbursements for purchases on account for each of the months October to December. (c) Prepare a cash budget, with a total column, for the quarter ending December 31, 2019, showing the expected cash receipts and payments for each month and the ending balance before financing for each of the month (d) Companies in the industry in which Miller Merchandising Company operates are required to maintain a minimum cash balance of $120,000 each month. Based on the budget prepared, will the business be meeting this requirement? Suggest four (4) possible steps (other than borrowing) that may be taken by Miller to improve the cash flow of the business and hence satisfy this requirement.

Answer rating: 100% (QA)

A Schedule of Budgeted Cash Collections for Sales on Account Month October Cash Sales 85000 Collections for August Sales on Account 420000 50 210000 T... View the full answer