Question

A company sells cars. The data following data are taken from a statement of financial position at March 31, 2019

Cash $6000

Accounts Receivable $18000

Inventories $34000

Accounts payable $19750

Additional info:

1) Actual and expected sales are:

March (Actual) $40000

April $50000

May $62000

June $80000

2) 30% of sales are on credit, the remaining are in cash. All credit sales are collected in the following month.

3) The ending inventory should be 70% of the following month's sales cost of goods sold.

4) Gross margin is expected to be 20% of sales

5) Of each month's purchases, 40% are paid in cash, and the remaining is paid for in the month following purchase,

6) Monthly operating expenses are: salaries in commissions, 10% of sales; rent, $2000 and other expenses, excluding depreciation equipment, equal to 8% of sales. All paid in the month where they are incurred. Monthly depreciation equipment is $800.

7) Equipment will be purchased in April $1500 in cash

8) The company has a policy that the ending cash balance in each month must be at least $3500. The company can borrow at the beginning of each month. All repayments are made at the end of the month. All borrowings and repayments are made in increments of $100. The interest rate on borrowings is 5% per year with interest being paid in the month of borrowings.

Question: Prepare the following budgets

1. Cash collections budget

	April	May
Cash sales
Credit sales
Total

2. Purchases Budget

	April	May	June
Desired ending inventory
Cost of goods sold
Beginning inventory
Total Purchases

Could anyone give an explanation on how to prepare the budgets step by step?

Answer 1

Answer (1) Cash collection Budget Particulars April Cash sales(70%of Total Sales) 35,000 Credit Sales 12,000 Total 47,000 May 43400 15,000 58,400 March 40,000 April 50,000 May 62,000 Working note: Particulars Total Sales Credit sales(30%) Collection of credit Sales in following month 12,000 15,000 18600 12.000 15,000 Steps in making cash collection budget First of all compute cash sales Next step is to record cash collected from credit sales of previous month as it is mentioned that credit sales are collected in next month Answer (2) June Particulars Desired ending Inventory(A) Cost of good sold(B) Beginining Inventory(C) Total purchases(A+B-C) Purchase Budget April 34720 40,000 28,000 46,720 May 44800 49,600 34,720 59,680 64,000 44,800 19,200 Working Note: June March 40,000 April 50,000 May 62,000 80,000 Total Sales Gross Profit @20% Cost of good sold 8000 10,000 12,400 16,000 32.000 40,000 49,600 64,000 Desired Inventory(70 % of following month COGS) 28,000 34720 44800