Reference no: EM133046375
Question - At the end of March 2016, St. Ann Manufacturing Co. Ltd was in overdraft at the bank to the extent of $540,000. Cash budgeting is critical to the company's financial information needs. The following information was extracted from the company's records:
(1) The table below provides information on budgeted sales for the periods indicated:
Budgeted Sales 2016 $
February 2,000,000
March 1,500,000
April 3,000,000
May 2,500,000
June 2,800,000
July 1,900,000
August 2,400,000
September 2,700,000
The company's records indicated that 70% of the company's sales were for cash and the remaining 30% was on credit. Past experience indicates that 80 per cent of the receivables generated in any month will be collected in the month following the sale, 19 per cent in the second month following the sale, and 1 per cent will prove uncollectible.
(2) Taxation for the first quarter of 2016 amounting to $1,200,000 was due in the first month of the second quarter.
(3) In March 2016, the company bought a motor truck for $4,000,000. The agreement with the supplier was that a down-payment of $2,000,000 would be made in the last month of the first quarter in 2016 and the balance paid off in equal amounts during the first two months of the second quarter in 2016.
(4) The company is to receive insurance claim of $4,500,000 for damage done to its warehouse during heavy rains. The amount is to be disbursed as follows: $2,000,000 in May 2016; $2,000,000 in June 2016; and the balance in July 2016.
(5) Investments held at bank of St. Andrew will mature in June 2016. The amount to be collected is expected to be $3,500,000. The company planned to pay dividends to, its shareholders amounting to $1,000,000 in May 2016. It also, planned to pay $1,500,000 in April 2016 for a plot of land to build a new warehouse.
(6) In May 2016 the company sold a motor vehicle for $400,000 to one of its staff members (payment is expected in the same month), while $300,000 written off as bad debt in $2015 was recovered in the first month of the second quarter in 2016. Rental income amounting to $1,800,000 per annum is budgeted for 2016.
(7) Operating expenses amounted to $7,200,000 is budgeted for 2016. Included in this figure is monthly depreciation of $100,000.
(8) Salesmen are paid a 5% commission based on the amounts collected from cash sales each month. Miscellaneous expenses amounting to $120,000 monthly was not included in the operating expenses budget.
(9) Records from the company's books revealed that 60% of purchases are for cash. 80% of inventory purchased on credit are paid in the month in which goods are purchased and the balance in the following month. The following table provides information on budgeted purchases for the periods indicated:
Budgeted Purchases 2016 $
February 1,500,000
March 1,100,000
April 2,000,000
May 1,400,000
June 1,600,000
July 1,000,000
August 1,600,000
September 1,200,000
(10) Short term financial support is made available from National Bank Ltd if the need arises. The interest rate on borrowings is 12% per annum on the principal amounts that are to be paid back. The company is allowed to borrow in the month of need and to repay the following month, only if it is able to do so fully. It has been decided by St. Ann Manufacturing Co. Ltd to maintain a minimum bank balance of $2 000 000 here on.
Required -
(a) Prepare a cash collection summary for credit collections for the second quarter of 2016.
(b) Prepare a cash disbursement summary for credit purchases for the second quarter of 2016.
(c) Prepare a cash budget for the second quarter of 2016. Clearly show amounts for cash sales, credit sales, cash purchases, credit purchases.