Reference no: EM131539496
Question: Abacus Company sells its product for $125 per unit. Its actual and projected sales follow.
All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 30% in the month after the sale, 48% in the second month after the sale, and 2% proves to be uncollectible. The product's purchase price is $100 per unit. All purchases are payable within 12 days. Thus, 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 25% of the next month's unit sales plus a safety stock of 100 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,200,000 and are paid evenly throughout the year in cash. The company's minimum cash balance at month-end is $60,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $60,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 9% interest rate. On May 31, the loan balance is $32,000, and the company's cash balance is $60,000.
Required: 1. Prepare a table that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.
2. Prepare a table that shows the computation of budgeted ending inventories (BEI) (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
4. Prepare a table showing the computation of cash payments on product purchases for June and July.
5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.
Analysis Component
6. Refer to your answer to part 5. Abacus's cash budget indicates the company will need to borrow more than $40,000 in June and will need to borrow $60,000 in July. Suggest some reasons that knowing this information in May would be helpful to management.