Managerial accounting

Digi Consulting is a relatively new firm that has a few major accounts at hand. They hire many young consultants that frequently work over time to meet clients needs. The company is seeking a $300,000 90-day loan from its bank to help meet cash requirements in the upcoming fourth quarter of the year, which also happens to be the firms busiest period. As Digi is a relatively new firm, the bank has requested for a cash budget for the quarter ending 31 December. The firms finance officer provided the following data:

(i) On October 1, the firm has a cash balance of $80,000.

(ii) Actual and budgeted revenue from August to December are as follows: August (actual) $800,000

September (actual) $900,000

October (budgeted) $1,200,000

November (budgeted) $1,600,000

December (budgeted) $1,530,000

Based on past experience, 30% of a months sales are collected in the month of sales, while 70% and 25% respectively of the remaining amount are collected in first and second months that follow. Thereafter, any amount remaining is deemed uncollectible.

(iii) Budgeted expenses for the fourth quarter are as follows: October November December

Salaries $560,000 $620,000 $620,000

Overtime wages $140,000 $100,000 $80,000

Advertising $150,000 $240,000 $200,000

Insurance payments $30,000 $30,000 $30,000

General administration expenses $20,000 $24,000 $22,000

All expenses are paid in full at the end of each month.

(iv) Rental is usually prepaid in the beginning of October for a quarter at the rate of $40,000 per month.

(v) Assume that the loan will be made at beginning of October and repaid at the end of December. Interest is calculated at 4% p.a. of the total loan amount and paid at the end of December.

Required: (a) Prepare a schedule of expected cash collections for October, November and December and for the quarter in total.

(b) Prepare a cash budget for the fourth quarter ended 31 December (show monthly columns and a total for the quarter). (10 marks)

(c) The company is considering a dividend payout of $300,000 to shareholders. If the company needs to maintain a minimum cash balance of $100,000 for operating purposes, propose and explain the month for which dividend payment should be planned. (2 marks)

(d) If the company needs a minimum cash balance of $100,000 at the start of the upcoming year, recommend whether the loan can be repaid at the end of the year. Based on your answer to (c), would you recommend the company to borrow a different amount? If so, what would be the optimal amount necessary for the company?