Prepare a Cash Budget Under Two Alternatives

Each autumn, as a hobby, Suzanne De Angelo weaves cotton place mats to sell at local

crafts shop. The mats sell for $ 20 per set of four. The shop charges a 10% commission and

remits the net proceeds to De Angelo at the end of December. De Angelo has woven

and sold 25 sets each of the last two years. She has enough cotton in inventory to make

another 25 sets. She paid $7 per set for the cotton. De Angelo uses a four harness loom

that she purchased for cash exactly two years ago. It is depreciated at the rate of $10

per month. The accounts payable relate to the cotton inventory and are payable by

September 30.

De Angelo is considering buying an eight-harness loom so that she can weave more

intricate patterns in linen. The new loom costs $ 1,000; it would be depreciated at $ 20

per month. Her bank has agreed to lend her $ 1,000 at 18% interest, with $200 principle

plus accrued interest payable each December 31. De Angelo believes she can weave

15 linen place mat set in time for the Christmas rush if she does not weave any cotton

mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. De Angelos

supplier will sell her linen on credit, payable December 31.

De Angelo plans to keep he old loom whether or not she buys the new loom. The

balance sheet for her weaving business at August 31 is as follows.

Suzane De Angelo, Weaver

Balance Sheet

for the period ending, August 31, 20XX

Current assets:

Current liabilities

Cash

$25

Account payable

$74

Inventory of cotton

175

200

Fixed assets:

Owner equity

386

Loom

500

Accumulated depreciation

(240)

260

Total assets

$460

$460

Requirements:

Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the place mats in cotton using the existing loom and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, and a budgeted balance sheet at December 31.

On the basis of financial considerations only, what should De Angelo do? Give your reason.

Give What nonfinancial factors might De Angelo consider in her decision?

Beginning cash balance	$ 25.00
Cash receipts from local craft shop	xxx
Cash available	xxx
Cash payments:
Accounts payable balance August 31	xxx
Ending cash balalnce	xxx
Directions:
Complete a cash budget using existing loom
Do not forget your heading
This is alternative 1

Beginning cash balance

xxx

Cash receipts from the local craft shop

xxx

Cash available

Cash Payments:

Accounts payable balance August 31

xxx

Purchases of linen

xxx

Purchases of new loom

xxx

Interest expense

xxx

Total cash payments

xxx

Ending cash balance before financing

(xxx)

Financing:

Borrowing

xxx

Principle repayments

(xxx)

Total effects of financing

xxx

Ebding cash balance

xxx

Directions:

Complete a cash budget using new loom

Do not forget your heading

This is alternative 2

Sales Revenue

xxx

Cost of Goods Sold

xxx

Gross Profit

xxx

Operating Expenses

Sales Comission

xxx

Depreciation Expense

xxx

Total Operating Expenses

xxx

Net Income

xxx

Sales Revenue		xxx
Cost of Goods Sold		xxx
Gross Profit		xxx
Operating Expenses
Sales Comission	xxx
Depreciation Expense	xxx
Total Operating Expenses		xxx
Operating Income		xxx
Interest Expense		xxx
Net Income		xxx
Directions:
Complete an Income Statement using new loom
Do not forget your heading
This is alternative 2

Directions:

Complete an Income Statement using existing loom

Do not forget your heading

This is alternative 1

Sales Revenue

xxx

Cost of Goods Sold

xxx

Gross Profit

xxx

Operating Expenses

Sales Comission

xxx

Depreciation Expense

xxx

Total Operating Expenses

xxx

Net Income

xxx

Assets
Current Assets:		xxx
Cash
Properrty, Plant and Equipment:
Loom	xxx
Less: Accumulated Depreciation	(xxx)	xxx
Total Assets		xxx
Liabilities		xxx
Stockholders' Equity
Stockholders' Equity		xxx
Total Liabilities and Stockholders' Equity		xxx
Directions:
Complete a Budgeted balance Sheet using existing loom
Do not forget your heading
This is alternative 1

Assets
Current Assets:
Cash	xxx
Inventory of Cotton	xxx
Total Current Assets		xxx
Properrty, Plant and Equipment:
Loom	xxx
Less: Accumulated Depreciation	(xxx)	xxx
Total Assets		xxx
Liabilities
Current Liabilities:
Notes Payable		xxx
Stockholders' Equity
Stockholders' Equity		xxx
Total Liabilities and Stockholders' Equity		xxx
Directions:
Complete a Budgeted balance Sheet using new loom
Do not forget your heading
This is alternative 2

Directions:

Complete an Income Statement using existing loom

Do not forget your heading

This is alternative 1