Ricketts Company plans to start a new business. The estimated pattern of cash flows for the first

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Question:

Ricketts Company plans to start a new business. The estimated pattern of cash flows for the first three months of 2019 is as follows:

i. 1 January 2019: deposit $2 000 000 into a business bank account.

ii. 1 January 2019: purchase of machinery for $35 000 and a delivery van for $600 000 – paying immediately by cheque.

iii. 5 January 2019: purchase of goods totaling $948 000, payments to be made in equal installments at the end of January, February, and March 2019.

iv. Credit sales: January $450 000, February $650 000, and March $650 000. Customers are expected to settle their accounts by the end of the month after the sale.

v. Cash sales are expected to average $120 000 per month and these customers are allowed a 5% discount.

vi. Salaries of $190 000 per month will be payable on the last day of each month.

vii. Sundry expenses of $210 000 per month will be payable during the month following. viii. Estimated corporation tax of $25 000 is to be paid in February 2019. Cash purchases are expected to be $200 000 per month.

Required:

a) Prepare Rickett’s cash budget for the three months ending 31 March 2019.

b) Give Rickett’s management two (2) pointers as to what action to take if a cash budget reveals liquidity challenges.