Question

Aztec Company sells its product for $150 per unit. Its actual and budgeted sales follow.

	Units	Dollars
April (actual)	4,500	$	675,000
May (actual)	2,600		390,000
June (budgeted)	6,000		900,000
July (budgeted)	5,000		899,000
August (budgeted)	4,200		630,000

All sales are on credit. Recent experience shows that 30% of credit sales is collected in the month of the sale, 40% in the month after the sale, 26% in the second month after the sale, and 4% proves to be uncollectible. The product’s purchase price is $110 per unit. 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 18% of the next month’s unit sales plus a safety stock of 50 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,500,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $110,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $110,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 14% interest rate. On May 31, the loan balance is $44,000, and the company’s cash balance is $110,000.

Required:
Prepare a schedule showing the computation of cash payments for product purchases for June and July. Cash payments on product purchases (for June and July) --------- Percent Paid in----- May June From purchases in: July May June July ------------ Amount Paid in----------- Total May June July From purchases in: May June July < Required 3 Required 5 >

4. Prepare a schedule showing the computation of cash payments for 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.

Answer 1

Solutions:

Cash payment on product purchases (for June and July)
		Percent paid in
		May	June	July
For Purchases in:
May		60%	40%
June			60%	40%
July				60%
		Amount paid in
	Total	May	June	July
For Purchases in:
May	$3,53,320	$2,11,992	$1,41,328
June	$6,40,200		$3,84,120	$2,56,080
July	$3,20,496			$3,20,496
Totals		$2,11,992	$5,25,448	$5,76,576
Aztec Company
Cash Budget
June and July
	June	July
Beginning cash balance	$1,10,000	$1,10,000
Cash receipts from sales	$6,01,500	$7,31,100
Total Cash available	$7,11,500	$8,41,100
Cash disbursements:
Payment for purchases	$5,25,448	$5,76,576
Selling and administrative expenses	$1,25,000	$1,25,000
Interest expense	$513	1090
Total Cash disbursements	$6,50,961	$7,02,666
Preliminary cash balance	$60,539	$1,38,434
Additional Loan (Loan repayment)	$49,461	-$28,434
Ending cash Balance	$1,10,000	$1,10,000
Loan Balance
	June	July
Loan Balance- Beginning of month	$44,000	$93,461
Additional Loan (Loan repayment)	$49,461	-$28,434
Loan Balance- End of month	$93,461	$65,028