Accounts-AW344

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Accounting for Managers

 

1 You have the following information about a H Ltd, a new business
 

 

 

Budgeted sales Credit
Budgeted Cash sales

 

 

 January, 2014    
     
     
     
40,000
30,000
February
45,000
20,000

 

March
 
50,000  
   
25,000
April
55,000
30,000

 

 

Collections on credit sales average 40 percent in the month of sales and the remaining 60 percent in the month following the sales.
 
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Cost of sales (purchases) averages 60% of total sales revenue.
 
Twenty percent of cost of sales is on cash basis, and 80 percent is paid in the month following purchases.
 
Other operating expenses according to the forecasted income statement follow
 

 
January

 

 

February
March

 

 

 Wages and salaries
 
 
 
 
 
 
$18,000
 
 
 
 
 
 
$18,000
 
 
 
 
 
 
$18,000
 
 
 
 
 
 
Office rent
 
 
 
 
 
6,000
 
 
 
 
 
6,000
 
 
 
 
 
6,000
 
 
 
 
 
Insurance
 
 
 
 
1,000
 
 
 
 
1,000
 
 
 
 
1,000
 
 
 
 
Utilities
 
 
 
2,000
 
 
 
2,000
 
 
 
2,000
 
 
 
Other operating costs
 
 
5,000
 
 
5,000
 
 
5,000
 
 
Depreciation
 
3,000
 
3,000
 
3,000
 
Interest expense

 

500
500 500

 

The insurance expense is paid in January each year in advance for the whole year ($12,000 per year).
 
The office rent is paid quarterly in advance starting January each year.
 
In March, the company plans to sell some old equipment and estimates it will received $10,000 from the sale.

 

At the same time, it must spend $30,000 on new equipment. The beginning cash balance on Jan 1 is $10,000. (Cash payment : March)
 
Required

  1. a) Prepare the business’s cash budget for each of the three months: January,

 

  1. b) Give three recommendations on how you could improve the cash flow of H Ltd.

 
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Summary