Pelican Merchandising & More is a family-owned store. The business is now approaching the end of the year and is in the process of identifying its cash needs for the first quarter of the new year. You are the management accountant of the entity and have been tasked to prepare the cash budget for the business for the quarter ending March 31, 2022.

(i) Extracts from the sales and purchases budgets are as follows: Month 2021 - 2022 Cash Sales Sales On Account Cash Purchases Purchases On Account November 2021 $138,100 $480,000 $345,000 December 2021 $156,500 $600,000 $25,800 $380,000 January 2022 $170,975 $650,000 $44,625 $400,000 February 2022 $135,740 $700,000 $30,400 $480,000 March 2022 $226,420 $800,000 $55,100 $540,000

(ii) An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 4/30, n90: 55% in the month of sale 35% in the first month following the sale 8% in the second month following the sale The remaining 2% is expected to be uncollectible

(iii) Accounts payable are settled as follows, in accordance with the credit terms 2/30, n60: 85% in the month in which the inventory is purchased 15% in the following month

(iv) The management of Pelican Merchandising has negotiated with a tenant to sublet office space to her beginning February 1. The rental is expected to be $552,000 per annum. The first month’s rent along with one month’s safety deposit is expected to be collected on February 1. Thereafter, monthly rental income becomes due at the beginning of each month.

(v) Office Furniture & Fixtures, which is estimated to cost $350,000, will be purchased in February. The manager has made arrangement with the suppliers to make a cash deposit of 40% upon signing of the agreement in February. The balance will be settled in five (5) equal monthly instalments beginning March of 2022.

(vi) The management of Pelican Merchandising is in the process of upgrading its fleet of motor vehicles. During February the business expects to sell an old delivery motor van that cost $540,000 at a loss of $34,000 to an employee. Accumulated depreciation on this motor van at that time is expected to be $246,000. The employee will be allowed to pay a deposit equal to 60% of the selling price in February; the balance will be settled in two equal amounts in March & April of 2022.

(vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,088,000 per annum, which include depreciation on non-current assets of $42,000 per month and are expected to be settled monthly.

(viii) Other operating expenses which accrue evenly throughout the year are expected to be $696,000 per annum and will be settled monthly.

(ix) A long-term bond purchased by Pelican Merchandising 2 years ago, with a face value of $450,000 will mature on January 15, 2022. To meet the financial obligations of the business, management has decided to liquidate the investment upon maturity. On that date semi-annual interest computed at a rate of 8⅓% per annum is also expected to be collected.

(x) A compensation payment of $355,000 to a former employee for a back injury sustained in an accident in the business storage facility, not covered by insurance, becomes due and payable on January 25, 2022.

(xi) Wages and salaries are expected to be $3,264,000 per annum and will be paid monthly.

(xii) The cash balance on March 31, 2022 is expected to be an overdraft of $253,000

Required: (a) The business needs to have a sense of its future cash flows and therefore requires the preparation of the following:

▪ A schedule of budgeted cash collections for trade receivables (sales on account) for each of the months January to March.

▪ A schedule of expected cash disbursements for accounts payable (purchases on account) for each of the months January to March.

▪ A cash budget, with a total column, for the quarter ending March 31, 2022, showing the expected cash receipts and payments for each month and the ending cash balance for each of the three months, given that no financing activities took place.

Answer rating: 100% (QA)

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