Reference no: EM132910998

Green Ltd investigates budget variances on a quarterly basis. The following data is provided to you.

• Estimated total sales: April $ 55,000 and May $ 50,000
• Cash sales are estimated to be 20% of total sales. Debtors are expected to pay 50% in the month of sale and 45% in the month after the sale.
• Estimated purchases: April $ 30,000 and May $ 36,000
• All purchases are to be on credit and are to be paid for in the month following the purchase. Purchases for March were $22,000. Sales for the month of March were $14,000
• Estimated operating expenses are:
• Transport expenses paid in cash 15% of total sales.
• Office salaries paid in cash: April $9,000, May $11,600.
• Depreciation is charged at 25% per annum on new equipment purchased for $50,000 in April. The equipment was purchased on credit in April and will paid for in May.
• Other information:
• The owner contributed $75,000 as the opening balance of cash for the business in April.
• The owner intends withdrawing $3,000 per month for private use.
• The company wants to maintain a minimum cash balance of $25,000 and has set up a line of credit at the local bank that can be used to cover any shortage.

Required:

Problem a. Prepare cash budget for the two months April and May.

Problem b. List two problems that may be encountered in preparing a budget.