Kat Ltd.s September balance sheet contains the following information: Cash.............................................................................$ 37,500 (dr) Accounts receivable....................................................126,000 (dr) Allowance for

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Kat Ltd.’s September balance sheet contains the following information:

Cash.............................................................................$ 37,500 (dr)
Accounts receivable....................................................126,000 (dr)
Allowance for doubtful accounts...................................2,800 (cr)
Merchandise inventory.................................................26,250 (dr)


Management has designated $37,500 as the firm’s minimum monthly cash balance. Other information about the firm and its operations is as follows:

a. Sales revenues of $350,000, $420,000, and $312,500 are expected for October, November, and December, respectively. All goods are sold on account.

b. The collection pattern for accounts receivable is 60% in the month of sale, 39% in the month following the month of sale, and 1% uncollectible, which is set up as an allowance.

c. Cost of goods sold is 60% of sales revenues.

d. Management’s target ending balance of merchandise inventory is 10% of the current month’s budgeted cost of goods sold.

e. All accounts payable for inventory are paid in the month of purchase.

f. Other monthly expenses are $49,250, which includes $3,500 of depreciation and $2,000 of bad debt expense.

g. In the event of a shortfall, the company borrows money. In contrast, in the event of excess cash, the company invests in short-term investments. Borrowings and investments are assumed to be made at the end of a month in increments of $6,250.

h. Interest on borrowings is 10% per year, payable every quarter, on the accumulated amount of the loan; similarly, interest earned on investments is 8% per year on the accumulated investments and is received every quarter. Investments can be matured and the principal amount redeemed in June or December of a year.


Required:

1. Prepare a merchandise purchases budget for October and November.

2. Prepare the cash budgets for October and November, including the effects of financing (borrowing or investing). Interest is earned or paid quarterly.

Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive...
Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Related Book For  book-img-for-question

Introduction to Managerial Accounting

ISBN: 978-1259105708

5th Canadian edition

Authors: Peter C. Brewer, Ray H. Garrison, Eric Noreen, Suresh Kalagnanam, Ganesh Vaidyanathan

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