Question

Problem 22-7AA Merchandising: Preparation and analysis of cash budgets with supporting inventory and purchases budgets LO P4

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

	Units	Dollars
April (actual)	4,000	$	640,000
May (actual)	2,800		448,000
June (budgeted)	4,500		720,000
July (budgeted)	3,500		719,000
August (budgeted)	4,100		656,000

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 21% of the next month’s unit sales plus a safety stock of 125 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,428,000 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 10% interest rate. On May 31, the loan balance is $45,500, and the company’s cash balance is $110,000.

Required:
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.
2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
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.

Percent Collected in June April May July August Credit sales from: April May June July August Amount Collected in June Total April May July August Credit sales from: April May June $ 640,000 448,000 720,000 560,000 656,000 July August

5 part question :))

Answer 1

		Percentage 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	640000	166400	281600	166400
May	448000		116480	197120	116480
June	720000			187200	316800	187200
July	719000				186940	316360
August	656000					170560
		166400	398080	550720	620220	674120

Aztec Company
Budgeted Ending Inventory
for April, May, June, July
	April	May	June	July
Next month's Budgeted Sales(Units) (a)	2800	4500	3500	4100
Ratio of inventory to future sales (b)	21%	21%	21%	21%
Budgeted "base" ending inventory (axb)	588	945	735	861
Add:Safety stock	125	125	125	125
Budgeted ending Inventory	713	1070	860	986

Aztec Company
Merchandise Purchases Budgets
for April, May, June, July
	May	June	July
Budgeted ending Inventory	1070	860	986
Add:Budgeted Sales	2800	4500	3500
Required Units of available merchandise	3870	5360	4486
Less:Beginning Inventory	713	1070	860
Budgeted Purchases	3157	4290	3626
Budgeted cost per unit	110	110	110
Budgeted cost of merchandise purchases	347270	471900	398860

Cash Payments on Purchases ( for June and July )
		Percent Paid in
		May	June	July
From purchase in:
May		60%	40%
June			60%	40%
July				60%
		Amount Paid in
	Total	May	June	July
From purchase in:
May	347270	208362	138908
June	471900		283140	188760
July	398860			239316
		208362	422048	428076

Aztec Company
Cash Budget
June and July
	June	July
Beginning Cash balance	110000	110000
Cash receipts from customers	550720	620220
Total available cash	660720	730220
Cash disbursements
Payment on Purchases	422048	428076
Selling and administrative expenses ( $ 1428000 / 12)	119000	119000
Interest Expenses	379	302
Total Disbursements	541427	547378
Preliminary cash balance	119293	182842
Additional loan from bank
Repayment of loan to bank	9293	36207
Ending Cash balance	110000	146635
Loan Balance
	June	July
Loan Balance - beginning of month	45500	36207
Additional Loan ( loan repayment)	-9293	-36207
Loan Balance - end of month	36207	0

June Interest Expense = $ 45500 x 10% x 1/12 = $ 379

July Interest Expense = $ 36207 x 10% x 1/12 = $ 302