50 RELATIONSHIPS Problem 9-48 Understanding Relationships, Cash Budget, Pro Forma Balance Sheet Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of 2014: Sales: 2 a. May (actual) R1,000,000 June (actual) 1,200,000 July (estimated) 900,000 August (estimated) 1,000,000 September (estimated) 1,350,000 October (estimated) 1,110,000 b. Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale. c. Each month, the ending inventory exactly equals 50% of the cost of next month's sales. The markup on goods is 25% of cost. d. Inventory purchases are paid for in the month following the purchase. e. Recurring monthly expenses are as follows: Salaries and wages R100,000 Depreciation on plant and equipment 40,000 Utilities 10,000 Other 17,000 f. Property taxes of R150,000 are due and payable on July 15, 2014 (Continued) Chapter 9 - 8. Advertising fees of R60,000 must be paid on August 20, 2014 1. A lease on a new storage facility is scheduled to begin on September 2, 2014. Monthly payments are R50,000. The company has a policy to maintain a minimum cash balance of R100,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of a month. The annual interest rate is 9%. The company must borrow in multiples of R10,000 A partially completed balance sheet as of June 30, 2014, follows. (Note: Accounts payable is for inventory purchases only) Cash R Accounts receivable Inventory Plant and equipment, net 4,250,000 Accounts payable R Common stock 2,100,000 Total 2.687,500 R R Required: j Retained earnings 9 1. Complete the balance sheet given in Item j. 2. Prepare a cash budget for each month in the third quarter and for the quarter in total (the third quarter begins on July 1). Prepare a supporting schedule of cash collections. 3. Prepare a pro forma balance sheet as of September 30, 2014. 4. CONCEPTUAL CONNECTION Form a group with two or three other students. Discuss why a bank might require a cash budget for businesses that are seeking short-term loans. Determine what other financial reports might be useful for a loan decision. Also, discuss how the reliability of cash budgets and other financial information can be determined. OBJECTIVE 14 Problem 9.49 D