Question 1

Green Friends Ltd is a garden design and landscaping business that started operations on 1 September 2020. The following information has been provided by the firm.

In September, cash sales were $5,000 and credit sales $45,000. Total expected sales in the following three months are: $70,000 in October; $78,000 in November; and $82,000 in December. The company expects 10% of the sales of each month to be cash sales and the remainder credit sales. Credit sales are expected to be collected 20% in the month of the sale, 50% in the next month, and 30% in the following month.

All purchases of inventory are on credit. Purchases of inventory in September were $18,000. The company estimates purchases in the following three months to be: $19,000 in October, $20,000 in November and $21,000 in December. Purchases are paid 80% in the month of purchase, and 20% in the following month.

Wages expense is estimated to be $15,000 in October, $18,000 in November and $19,000 in December, paid in cash.

Other operating expenses are budgeted to be $12,000 in October, $14,000 in November and $18,000 in December, paid in cash.

Depreciation expenses of $1,250 per month are expected.

The cost of sales is estimated as 25% of sales revenue each month.

In October, computers costing $8,000 will be purchased and paid in cash.

In December a cash dividend of $20,000 will be paid.

In November, it is expected to receive $400 cash from the sale of old equipment at its net book value.

The cash balance at 1^st October 2020 was $7,500

Required:

1.Pre-pare a Budgeted Income Statement for the period October - December 2020.

Budgeted Income Statement

For the period October - December 2020

October - December ($)

2.Pre-pare a schedule of estimated receipts from debtors (accounts receivable) for the months of October, November and December 2020.

Month of cash collection

Month

Credit Sales

Oct

Nov

Dec

3.What is the amount of accounts receivable at 31^st December 2020?

Oct ($)

Nov ($)

Dec ($)

4.Pre-pare a cash budget for October, November and December 2020

5.What is the amount of accounts payable at 31^st December 2020?

6.How can you improve the cash budget?