CHAPTER 7: BUDGETING PROBLEM 7-9 Merchandise Purchases and Cash Budgets (L02 - CC7, 12]

Kat Ltd.'s September balance sheet contains the following information:

CHECK FIGURE (2) October 31 cash balance $40,950

Cash Accounts receivable Allowance for doubtful accounts $ 37,500 (dr) 126,000 (dr) 2,800 (c) 26,250 (dr)

Merchandise inventory Management has designated $37,500 as the firm's minimum monthly cash balance. Other information about the firm and its operations is as follows:

a. Sales revenues of $350,000, $420,000, and $312,500 are expected for October, November, and December, respectively. All goods are sold on account.

b. The collection pattern for accounts receivable is 60% in the month of sale, 39% in the month following the month of sale, and 1% uncollectible, which is set up as an allowance.

c. Cost of goods sold is 60% of sales revenues.

d. Management's target ending balance of merchandise inventory is 10% of the current month's budgeted cost of goods sold.

e. All accounts payable for inventory are paid in the month of purchase.

f. Other monthly expenses are $49,250, which includes $3,500 of depreciation and $2,000 of bad debt expense

g. In the event of a shortfall, the company borrows money. In contrast, in the event of excess cash, the company invests in short-term investments. Borrowings and investments are assumed to be made at the end of a month in increments of $6,250.

h. Interest on borrowings is 10% per year, payable every quarter, on the accumulated amount of the similarly, interest earned on investments is 8% per year on the accumulated investments and is received ever quarter. Investments can be matured, and the principal amount redeemed in June or December of a year.

Required:

1. Prepare a merchandise purchases budget for October and November

2. Prepare the cash budgets for October and November, including the effects of financing (borrow investing). Interest is earned or paid quarterly.