QUESTION 5 (25 marks)

5a) Discuss in detail one reason (taught on your course) for why budgeting is an important business tool. (4 marks)

Tucker Ltd. has just started a NEW business with capital of 6,000. The following budgeted information is available:

JanuaryFebruaryMarch Sales40,00050,00060,000Purchases15,00030,00035,000

Sales will be 20% cash less a 15% discount for prompt payment; all remaining sales are on one months credit and it is expected that 10% will go bad.

Purchases are on a cash basis.

Utilities are 1,000 per month payable quarterly in arrears.

Rent is 2,000 per month and payable quarterly in advance.

Wages of 1,500 per month are paid in the month incurred.

A loan of 8,000 will be taken out in January.

Depreciation is 4,000 per month.

A car will be purchased for 10,000 in February.

5b) Create a cash budget showing the three months January, February and March. (14 marks)

5c) Comment on the closing cash balances between January and March and suggest what problems they might cause Tucker Ltd. (3 marks)

5d) Explain in detail how sales receipts could be better managed. (4 marks)