Reference no: EM132562321
Question - Kerrydale Ltd is in the process of preparing budgets for the period October to December 2019. The following information has been provided by the accounting department to assist in the budgeting process:
(i) Budgeted monthly sales revenue is as follows:
£
October 2019 50,000
November 2019 80,000
December 2019 60,000
January 2020 55,000
Sales are 20% cash and 80% on credit. 5% of the credit sales will not be received. The remainder of the credit sales are collected over a 3 month period: 15% in the month of sale, 70% in the month following sale and 15% in the second month following sale.
Total sales revenue in August is expected to amount to £40,000 and in September to £46,000.
(ii) Purchases are expected to amount to £47,500 in October, £43,000 in November, and £27,750 in December. 50% of purchases are paid in the month of purchase. The remaining 50% is paid for in the month following purchase. At 30 September, the amount owed for purchases was £11,700.
(iii) A grant of £20,000 from Glasgow City Council is expected to be received in mid-October.
(iv) A van which cost £8,000 when purchased 5 years ago, is expected to be sold in December for £3,000. The net book value of the van is £1,800.
(v) Equipment costing £4,500 will be purchased in November. The equipment will be depreciated on a straight line basis over 4 years.
(vi) Operating expenses are paid as incurred. These have been estimated to be £12,800 in October, £18,900 in November, and £14,600 in December. Each of these figures includes depreciation on existing assets amounting to £2,000 per month.
(vii) The cash balance on 1 October 2019 is expected to be £8,000.
Required -
(a) Indicate a cash budget on a monthly basis for the period between October 2019 and December 2019.
(b) Outline three items which would be included in a cash budget but not in a budgeted statement of profit and loss.
(c) Briefly explain three potential issues associated with the traditional budgeting process.
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