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

Cash $37,500 (dr)

Accounts Receivable $126,000 (dr)

Allowance for Doubtful Accounts $2,800 (cr)

Merchandise Inventory $26,250 (dr)

Management has designated $37,500 as the firm's minimum monthly cash balance.

October 31 cash balance: $40,950

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 loan; similarly, interest earned on investments is 8% per year on the accumulated investments and is received every 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 (borrowing or investing). Interest is earned or paid quarterly.

1.

Kat Ltd.
Merchandise Purchases Budget
	October	November	December
Budgeted sales
Budgeted cost of goods sold
Add desired ending inventory
Total needs
Less beginning inventory
Required inventory purchases

2.

Kat Ltd.
Cash Budget
	October	November
Cash balance, beginning
Add collections from sales
Total cash available
Less disbursements:
Purchases for inventory
Monthly expenses
Total disbursements
Excess (deficiency) of cash
Financing:
Investments..................**
Borrowings
Repayments
Interest
Total financing
Cash balance, ending

Also, please explain how you calculate the investment