Question

Aztec Company sells its product for $160 per unit. Its actual and budgeted sales follow.

	Units	Dollars
April (actual)	5,000	$	800,000
May (actual)	2,000		320,000
June (budgeted)	5,500		880,000
July (budgeted)	4,500		879,000
August (budgeted)	4,000		640,000

All sales are on credit. Recent experience shows that 26% of credit sales is collected in the month of the sale, 44% 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 24% of the next month’s unit sales plus a safety stock of 95 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,440,000 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 11% interest rate. On May 31, the loan balance is $44,500, and the company’s cash balance is $110,000.

1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.

Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.

	Percent Collected in April May June July August Credit sales from: April 26% 44% 26% May 26% 44% 26% June 26% 44% 26% July 26% 44% August 26% Amount Collected in Total April May June July August Credit sales from: April $800,000 May 320,000 June 880,000 July 720,000 August 640,000

• Required 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.

AZTEC COMPANY Cash Budget June and July June July Beginning cash balance $110,000 $110,000 Cash receipts from customers 577,600 698,940 Total cash available 687,600 808,940 Cash payments for: Purchases 472,120 520,520 Selling and administrative expenses 120,000 120,000 Interest expense 408 45 Interest expense Total cash payments 592,528 640,565 Preliminary cash balance 95,072 167,875 Additional loan (loan repayment) 14,928 (57,875) Ending cash balance $110,000 $110,000 Loan balance June July Loan balance - Beginning of month $44,500 $59,428 Additional loan (loan repayment) 14,928 (57,875) Loan balance - End of month $59,428 $1,553

Answer 1

Solutions:

Computation of Cash receipts from sales
			Percent Collected in
		April	May	June	July	August
Credits sales from:
April		26%	44%	26%
May			26%	44%	26%
June				26%	44%	26%
July					26%	44%
August						26%
Computation of Cash receipts from sales
		Amount Collected in
	Total	April	May	June	July	August
Credits sales from:
April	$7,68,000	$2,08,000	$3,52,000	$2,08,000
May	$3,07,200		$83,200	$1,40,800	$83,200
June	$8,44,800			$2,28,800	$3,87,200	$2,28,800
July	$6,15,300				$2,28,540	$3,86,760
August	$1,66,400					$1,66,400
Totals		$2,08,000	$4,35,200	$5,77,600	$6,98,940	$7,81,960
Aztec Company
Budgeted Ending Inventory
	April	May	June	July
Next month's Budgeted sales (units)	2000	5500	4500	4000
Ratio of inventory to Future sales (percent)	24%	24%	24%	24%
Budgeted "base" ending inventory	480	1320	1080	960
Safety Stock	95	95	95	95
Budgeted Ending Inventory	575	1415	1175	1055
Aztec Company
Merchandise Purchase Budget
	May	June	July
Budgeted Ending Inventory	1415	1175	1055
Add: Budgeted sales units	2000	5500	4500
Required units of available merchandise	3415	6675	5555
Less: Beginning Inventory	575	1415	1175
Budgeted purchases (Units)	2840	5260	4380
Budgeted Cost per unit	$110	$110	$110
Budgeted cost of merchandise purchases	$3,12,400	$5,78,600	$4,81,800
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	$3,12,400	$1,87,440	$1,24,960
June	$5,78,600		$3,47,160	$2,31,440
July	$2,89,080			$2,89,080
Totals		$1,87,440	$4,72,120	$5,20,520
Aztec Company
Cash Budget
June and July
	June	July
Beginning cash balance	$1,10,000	$1,10,000
Cash receipts from sales	$5,77,600	$6,98,940
Total Cash available	$6,87,600	$8,08,940
Cash disbursements:
Payment for purchases	$4,72,120	$5,20,520
Selling and administrative expenses	$1,20,000	$1,20,000
Interest expense	$408	545
Total Cash disbursements	$5,92,528	$6,41,065
Preliminary cash balance	$95,072	$1,67,875
Additional Loan (Loan repayment)	$14,928	-$57,875
Ending cash Balance	$1,10,000	$1,10,000
Loan Balance
	June	July
Loan Balance- Beginning of month	$44,500	$59,428
Additional Loan (Loan repayment)	$14,928	-$57,875
Loan Balance- End of month	$59,428	$1,553