Reference no: EM13341187

Budgeting

Pandorica Ltd has provided the estimates below for the October-December quarter in 2014:

October November December

$ $ $

Sales 55,000 63,000 57,000

Purchases 31,000 36,000 29,000

Operating expenses 20,000 21,000 23,500

You are also given the following additional information:

50% of sales are cash sales, the remaining 50% are credit sales and are collected as follows:
25% in the month of sale
40% in the month after sale
30% 2 months after sale
5% lost in bad debts

· Sales in the months of August and September were $53,000 and $51,500 respectively.

· Operating expenses include depreciation each month of $1,350. All expenses and purchases are paid for in the same month they are incurred.

· The firm expects to sell some old machinery for $11,000 in October. New machinery worth $38,000 will be purchased in November (depreciation expense will not change as a result).

· The cash balance on 30th September 2014 is $2,500.

REQUIRED:

a) Prepare a cash budget for PandoricaLtd for the three months October to December 2014. Show all workings.

b) Pandorica Ltd is budgeting for a cash deficit at the end of one of the months included in their cash budget. Explain how PandoricaLtd could prepare for this forecasted deficit. (maximum 150 words)