Question Two

Required:

Prakash and Declan run a bakery in Palmerston. They have estimated their cash receipts and payments for the quarter ending 30th September 2023.

July August September

Receipts Sales ....................................................................................................................... $198,000. $231,000 $282,000 Sale proceeds of old ovens......................................................................................................................... 97,500 Payments Ingredients...........................................................................................................51,000 58,650 71,850

Head Baker's wages........................................................................................15,000 15,000 15,000

Salaries and retail staff wages...................................................................52,500 58,500 67,500

Replacement ovens.........................................................................................198,750 Rent and administration expenses..........................................................30,000 30,000 30,000

At the 30th June 2023 the business had a bank balance of $58,350.

a) Prepare a cash budget for July, August and September 2023 identifying the monthly total receipts, total payments and the anticipated closing bank balance at the end of each month.

b) Prakash and Declan have been looking at the opportunity for expansion of their business. At the moment they are replacing the old equipment but are considering the purchase of additional ovens with a larger capacity in the future in three to four years' time.

They would like advice about leasing the replacement ovens instead of buying them outright in July and how this could affect their projected cash flow and the flexibility of their options. They have advised you that the monthly lease payments would be $17,250 per month.

Prepare an amended cash budget to reflect a leasing agreement instead of an outright purchase of the replacement ovens and explain the differences to Prakash and Declan.