QUESTION 21 (30 MARKS) The management accountant at Hewitt Manufacturing Company, Conrad Fuller, is in the process of preparing the cash budget for the business for the quarter ending December 31, 2010. Extracts from the sales and purchases budgets are as follows: i) ii) iv) v) vi) vii) viii) ix) x) xi) Month (c) August September October (d) November December Cash Sales $45,000 $60,000 $38,000 $47,000 $51.000 Sales on Account $480,000 $600,000 $720,000 $640,000 $800,000 An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 10/30, n90: 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale Purchases on Account $400,000 $380,000 $480,000 Accounts payable are settled as follows: 70% in the month in which the inventory is purchased 30% in the following month The credit terms of the suppliers is 5/30, n60. $500,000 $600,000 A motor vehicle costing $350,000 will be purchased and paid for in November 2010. During December, the management of Hewitt Manufacturing Company expects to sell equipment that cost $450,000 at a gain of $60,000. Accumulated depreciation on this equipment is $380,000. The University of the West Indies. A money market instrument purchased by the company with a face value of $300,000 will mature on October 1, 2010. On that date quarterly interest computed at a rate of 15% per annum will also be collected. Required: (a) (b) On the advice of their financial management team, Hewitt Company has decided to raise additional capital for the business by issuing additional shares in December 2010. Proceeds from the issue of these shares are expected to amount to $850,000. Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,800,000 per annum, [including depreciation on property, plant & equipment of $40,000 per month] and are settled monthly. Commission and other selling expenses are expected to be $144,000 per quarter and are settled in the month incurred. Wages and salaries are expected to be $2,880,000 per annum and will be paid monthly. Continued................. Course Code MS 15B The company is expected to pay rent and property taxes of $50,000 each month. The cash balance on September 30, 2010 is expected to be an overdraft of $45,000 7 Prepare schedules of budgeted cash collections from customers and budgeted cash payments for inventory purchases, for each of the months October to December. (8 marks) Prepare a cash budget, with a total column, for the quarter ending December 31, 2010, showing the expected cash receipts and payments for each month, and the ending cash balance before financing for each month. (16 marks) All companies in the industry in which Hewitt Manufacturing operates are required to maintain a minimum cash balance of $50,000 each month. Suggest two (2) possible steps that may be taken to satisfy this requirement, other than by way of borrowing. (4 marks) If Hewitt eliminates any cash deficiency by borrowing in $5,000 notes from National Bank, how much will the company need to borrow to cover October's shortfall? (2 marks)

QUESTION 21 (30 MARKS) The management accountant at Hewitt Manufacturing Company, Conrad Fuller, is in the process of preparing the cash budget for the business for the quarter ending December 31, 2010. Extracts from the sales and purchases budgets are as follows: Purchases Sales Month Cash on on Sales Account Account August $45,000 $480,000 $400,000 September $60,000 $600,000 $380,000 October $38,000 $720,000 $480,000 November $47,000 $640,000 $500,000 December $51,000 $800,000 $600,000 i) ii) iii) 3 B iv) v) vi) vii) An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 10/30, n90. 50% in the month of sale 30% in the first month following the sale 20% in the second month following the sale Accounts payable are settled as follows: 70% in the month in which the inventory is purchased 30% in the following month The credit terms of the suppliers is 5/30, 60, A motor vehicle costing $350,000 will be purchased and paid for in November 2010. During December, the management of Hewitt Manufacturing Company expects to sell equipment that cost $450,000 at a gain of $60,000. Accumulated depreciation on this equipment is $380,000. A money market instrument purchased by the company with a face value of $300,000 will mature on October 1, 2010. On that date quarterly interest computed at a rate of 15% per annum will also be collected. On the advice of their financial management team, Hewitt Company has decided to raise additional capital for the business by issuing additional shares in December 2010. Proceeds from the issue of these shares are expected to amount to $850,000. Fixed operating expenses which accrue evenly throughout the year, are estimated to be $1,800,000 per annum, [including depreciation on property, plant & equipment of $40,000 per month] and are settled monthly. viii) Commission and other selling expenses are expected to be $144,000 per quarter and are settled in the month incurred. ix) Wages and salaries are expected to be $2,880,000 per annum and will be paid monthly The University of the West Indies Course Code MS 15B Continued x) The company is expected to pay rent and property taxes of $50,000 each month. xi) The cash balance on September 30, 2010 is expected to be an overdraft of $45,000 Required: (a) (b) (c) (d) Prepare schedules of budgeted cash collections from customers and budgeted cash payments for inventory purchases, for each of the months October to December. (8 marks) Prepare a cash budget, with a total column, for the quarter ending December 31, 2010, showing the expected cash receipts and payments for each month, and the ending cash balance before financing for each month. (16 marks) All companies in the industry in which Hewitt Manufacturing operates are required to maintain a minimum cash balance of $50,000 each month. Suggest two (2) possible steps that may be taken to satisfy this requirement, other than by way of borrowing. (4 marks) If Hewitt eliminates any cash deficiency by borrowing in $5,000 notes from National Bank, how much will the company need to borrow to cover October's shortfall? (2 marks)