Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Page 1 of 3 Irie Earrings Unlimited It is the end of March and you have just been hired as a new management trainee by

Page 1 of 3

Irie Earrings Unlimited

It is the end of March and you have just been hired as a new management trainee by Irie Earrings Unlimited, a distributor of hand-crafted earrings to various resort gift shops and craft vendors across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

Since you are well trained in budgeting, based on your education at the University of Technology, Jamaica, you have decided to prepare a cash budget for the upcoming second quarter of the year.

The company sells different styles of earrings, but all are sold for the same price. Actual sales of earrings for the last three months and budgeted sales for the next six months are as follows:

January (actual)..$200,000 May(budget)...$500,000 February(actual).$260,000 June (budget) $300,000 March (actual)$400,000 July (budget)...$280,000 April (budget).$650,000 August (budget)..$250,000

Actual and expected purchase of earrings (in pairs of earrings) are as follows: March (actual)50,000

April (budget).59,000

May(budget)...42,000

June (budget) 29,200

Suppliers are paid $4 for a pair of earrings. One-half of a months purchase is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a months sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:

Sales commissions.....4% of sales

Fixed:

Advertising. $200,000

Rent. 18,000

Salaries 106,000

Utilities 7,000

Insurance expired 3,000

Depreciation 14,000

Insurance is paid on an annual basis, in November of each year.

Page 2 of 3

The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payables in the first month of the following quarter.

A listing of the companys ledger accounts as of March 31 is given below:

Assets & Liabilities $

Cash 74,000

Accounts receivable ($26,000February sales

$320,000 March sales).. 346,000

Inventory... 104,000

Prepaid insurance 21,000

Property and equipment (net). .950,000

Accounts payable 100,000

Dividends payable.. 15,000

Capital stock.. 800,000

Retained earnings. 580,000

Part of the budgeting program will be to establish an ongoing line of credit at a local bank. Therefore, determine the borrowing that will be needed to maintain a minimum cash balance of $50,000. If the company has an outstanding loan balance and finds itself with cash in excess of the minimum balance, it plans to pay off the portion thereof of the loan outstanding to the extent it can do so.

All borrowing will be done at the beginning of a month; any repayments will be made at the end of a month.

The annual interest rate will be 12%. Interest will be computed and paid at the end of each quarter on all loans outstanding during the quarter.

Required:

Prepare the following for the second quarter of the year, in months and in total for the quarter:

1. A schedule of expected cash collection from customers.

(16 marks)

2. A schedule of expected cash disbursements to suppliers for merchandise. (Hint: determine the purchases in dollars first call this the purchases budget).

(21 marks)

3. A cash budget.

(53 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information Systems And Internal Control

Authors: Eddy Vaassen, Roger Meuwissen, Caren Schelleman

2nd Edition

0470753951, 9780470753958

More Books

Students also viewed these Accounting questions

Question

complete all the excel apple work

Answered: 1 week ago