Preparing Merchandise Purchases and Cash Budgets $[$LO$2-$ CC$8,13]1$

CHECK FIGURE

$(2)$ October $31$ cash balance: $$40,950$

Elon Co$.\text{'}$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

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.

c$.$ 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.