Question 2

Bernard Creighton is the controller for Creighton Hardware Store. In putting together the cash budget for the fourth quarter of the year, he has assembled the following data.

a. Sales

July (actual) R100 000

August (actual) R120 000

September (estimated) R90 000

October (estimated) R100 000

November (estimated) R135 000

December (estimated) R150 000

b. Each month, 20% of sales are for cash, and 80% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale.

c. Each month, the ending inventory exactly equals 40% of the cost of next months sales. The mark-up on goods is 33.33% of cost.

d. Inventory purchases are paid for in the month following purchase.

e. Recurring monthly expenses are as follows:

Salaries and wages R10 000

Depreciation on plant and equipment R4 000

Utilities R1 000

Other R1 700

f. Property taxes of R15 000 are due and payable on 15 September.

g. Advertising fees of R6 000 must be paid on 20 October.

h. A lease on a new storage facility is scheduled to begin on 2 November. Monthly payments are R5 000.

i. The company has a policy to maintain a minimum cash balance of R10 000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of the month. The annual interest rate is 9%. The company must borrow in multiples of R1 000.

j. A partially completed balance sheet as of 31 August is given below. (Accounts payable is for inventory purchases only.)

Assets

Liabilities and Owners Equity

R

R

Cash

?

Accounts receivable

?

Inventory

?

Plant and equipment

431 750

Accounts payable

?

Common stock

220 000

Retained earnings

268 750

Totals

?

?

Required:

2.1 Complete the balance sheet given in j above.

2.2 Bernard wants to see how the company is doing prior to starting the month of December. Prepare a cash budget for the months of September, October and November and for the three-month period in total (the period begins on 1 September). Provide supporting schedule of cash collections.

2.3 Prepare a pro-forma balance sheet as at 30 November.