Reference no: EM132615607
Question - Tokyo Company has budgeted sales revenues as follows:
|
|
January
|
February
|
March
|
April
|
|
Credit sales
|
$320,000
|
$345,000
|
$325,000
|
$380,000
|
|
Cash sales
|
80,000
|
123,000
|
205,000
|
255,000
|
|
Total Sales
|
$400,000
|
$468,000
|
$530,000
|
$635,000
|
Past experience indicates that 60% of the credit sales will be collected in the month of sale, 30% will be collected in the first month following sale, and 10% in the second month following sale. Purchases of inventory are all on credit and 65% is paid in the month of purchase and 35% in the month following the purchase. Budgeted inventory purchases are:
|
February
|
$250,000
|
|
March
|
$280,000
|
|
April
|
$305,000
|
Other cash disbursements budgeted: (a) selling and administrative expenses of $228,400 will be paid at the end of each month, (b) dividends of $60,000 will be paid in March, and (c) purchase of equipment in April for $20,000 cash.
The company wishes to maintain a minimum cash balance of $60,000 at the end of each month. The company borrows money from the bank at 12% interest per annum if necessary to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on 1 March was $65,000.
Required -
(a) Prepare a cash budget for the months of March and April.
(b) Suggest any Two major advantages of adopting the bottom-up budgeting approach. What caution must be exercised simultaneously?