A.    Prepare a budgeted income statement for each month during the May to July period. (Assume no expenses owing from previous period.)
B.    Prepare a cash budget for each month during the May to July period.
C.    Based on the information in requirements A and B, can Deep Dive Adventures meet its loan repayment of $200 000 at the end of July, or will the owner need to reduce her drawings during the period? Explain your conclusion.

Deep Dive Adventures operates a boat taking tourists to an area off the south coast of Australia to watch the annual mating season of the cuttlefish from May to July. During this time, male cuttlefish, a large squid-like fish, change colour to trick other larger male cuttlefish so that they can sneak up on the female cuttlefish. This provides a spectacular colour display for divers. The breeding period is limited and the adult cuttlefish die soon after laying their eggs. The number of tourists gradually builds up from May and dwindles by the end of July. You have been asked by the operator of Deep Dive Adventures to prepare a budget for the 3-month period from May to July.

You have determined from the previous years financial information and discussions with the owner of the business that the following are reasonable projections for the 3 months operations:

Salaries: Three people are employed to run the boat and help passengers with their diving gear. The monthly salary is $12 000.

Expenses: Monthly fixed expenses for the business are expected to be $42 000, including $3000 depreciation on the boat. For each customer, food is provided at a cost of $10 and insurance of $24 is paid.

Collections: All customers book their cuttlefish tour in advance and pay a $20 deposit; the balance of the $200 fee is paid when the tour is taken. About 5% of customers who book a tour cannot take it and so lose their deposit. Approximately 20% of customers book 2 months in advance of their tour, 50% book a month in advance and 30% book in the actual month of their tour. No sales are made on account and all tours are paid in full before a customer is allowed on the boat.

Payments: All salaries are paid in the month in which the service is performed; 60% of the monthly cash operating expenses, food costs and insurance costs are paid in the same month, and 40% of them are paid in the next month.

Customers: The boat can take twenty passengers at a time and does two tours a day, seven days a week from May to July. From past experience it is estimated that the following percentage of capacity is booked for each month:

  May    70%

  June    90%

  July    80%

Cash balance: Deep Dive Adventures expects to have a cash balance at the beginning of May of $20 000 including deposits paid in advance. The owner of the business takes out drawings of $40 000 for each of the 3 months as her income for the year. At the end of July, Deep Dive Adventures has to pay back a loan of $200 000.