Question 3 (35 marks)

Mischa Furniture Stores (MFS) is a company that specialises in office furniture based in Windhoek. Due to the effects of Covid-19, it has become very imperative for the company to manage its cash flows effectively. The owner of MFS knows of your skills in management accounting and has requested your service in the preparation of the forth coming quarters cash budget. Upon interviews with different departments at MFS, you have ascertained the following information:

1. Budget information for January, February and March 2023 is as follows:

January February March

N$ N$ N$

Sales 590 000 650 000 750 000

Production costs 300 000 350 000 420 000

Sales and Administration costs 150 000 170 000 200 000

Purchase of non-current assets - - 120 000

2. Due to reduced income as a result of Covid-19, the company expects 10% of sales to be on cash and bad debts of 5% are anticipated.

3. 60% of the customers will pay in the month after sale and the balance will pay two months after sale. 4. As for the period under review, included in the monthly production costs is depreciation and insurance amounting to N$60 000 combined.

5. Insurance premium costs N$384 000 annually and is paid in January every year.

6. The remaining production costs are paid as: 80% in the month in which they are incurred and the balance in the following month.

7. The following balances are anticipated at 1 January 2023:

N$

Bank balance 55 000

Accounts receivable (net of allowance for bad debts) (see note 8) 611 135

8. The balance of accounts receivable at 1 January 2023 is comprised of N$459 135 from December 2022 sales and N$152 000 from November 2022 sales.

9. Current liabilities at 1 January 2023 comprise of N$100 000 short term loan payable in February 2023 at a premium of 2% and N$60 000 accounts payable incurred in December 2022 for production costs. 10. All selling and administration costs are paid in cash in the month in which they are incurred.

11. Shareholder dividends will be paid in January 2023 amounting to N$35 000. MFS anticipates receiving a dividend of N$8 000 on their investments in February 2023.

Required:

3.1 Showing all relevant workings, prepare a cash budget for January, February and March 2023 in table format. Use the format illustrated below for the cash budget: [26]

Cash budget for the three months ending 31 March 2023

January February March

N$ N$ N$

3.2 Calculate the accounts receivable and accounts payable figure for inclusion in the statement of financial position as at 31 March 2023. [5]

3.3 Using the cash budget, you have prepared, what advice would you give to the company [4]

TOTAL MARKS 35