Question 1

At the end of March 2016, Carlos Manufacturing Company Ltd was in overdraft at the bank to the extent of $540,000. Cash budgeting is critical to the companys financial information needs. The following information was extracted from the companys records:

(1) The table below provides information on budgeted sales for the periods indicated:

Budgeted Sales

2016	$
February	2,000,000
March	1,500,000
April	3,000,000
May	2,500,000
June	2,800,000
July	1,900,000
August	2,400,000
September	2,700,000

The companys records indicated that 70% of the companys sales were for cash; and 30% was received two months after sale.

(2) Taxation for the first quarter of 2016 amounting to $1,200,000 was due in the first month of the second quarter.

(3) In March 2016 the company bought a motor truck for $4,000,000. The agreement with the supplier was that a down-payment of $2,000,000 would be made in the last month of the first quarter in 2016 and the balance paid off in equal amounts during the first two months of the second quarter in 2016.

(4) The company is to receive insurance claim of $4,500,000 for damage done to its warehouse during heavy rains. The amount is to be disbursed as follows: $2,000,000 in May 2016; $2,000,000 in June 2016; and the balance in July 2016.

(5) Investments held at bank of St. Andrew will mature in June 2016. The amount to be collected is expected to be $3,500,000. The company planned to pay dividends to, its shareholders amounting to $1,000,000 in May 2016. It also, planned to pay $1,500,000 in April 2016 for a plot of land to build a new warehouse.

(6) In May 2016 the company sold a motor vehicle for $400,000 to one of its staff members while $300,00 written off as bad debt in $2015 was recovered in the first month of the second quarter in 2016. Rental income amounting to $1,800,000 per annum is budgeted for 2016.

(7) Operating expenses amounted to $7,200,000 is budgeted for 2016. Included in this figure is monthly depreciation of $100,000.

(8) Salesmen are paid commission based on the amounts collected from sales each month. The amount is 5% of sales collection each month. Miscellaneous expenses amounting to $120,000 monthly was not included in the operating expenses budget.

(9) Records from the companys books revealed that 60% of purchases are for cash; 20% is paid for one month later; and the balance one month later. The following table provides information on budgeted purchases for the periods indicated:

Budgeted Purchases

2016	$
February	1,500,000
March	1,100,000
April	2,000,000
May	1,400,000
June	1,600,000
July	1,000,000
August	1,600,000
September	1,200,000

(10) Short term financial support is made available from National Bank Ltd if the need arises. The interest rate on borrowings is 12% per annum on the principal amounts that are paid back. The company is allowed to borrow at the beginning of the month and to pay back at the end of the month in multiples of $20,000. No more cash is to be borrowed than is needed and repayments are to be done promptly as long as there is sufficient cash to do so.

Required:

(a) A cash collection summary from sales showing cash and credit collections separately for the second quarter of 2016. (5 marks)

(b) A payment summary for purchases showing cash purchases and credit purchases separately for the second quarter of 2016. (5 marks)

(c) A cash budget for the second quarter of 2016. Clearly show amounts for cash sales, credit sales, cash purchases, credit purchases and totals. (30 marks)