The accountant for Roadrunner Food Services is preparing its cash budget for November and December 2018. The accountant, Ross Leon, has collected the following information regarding expected credit sales and expected purchases of inventory on credit:

sep. oct nov dec

credit sales. 170,000 180,000. 190,000 210,000

credit purchases 125,000 95,000 140,000 155,000

Ross has analysed the accounts receivable records for the past few years and has determined that customers normally pay 60 per cent in the month of sale, 30 per cent in the month following the sale, and 8 per cent in the second month following sale. The remaining 2 per cent is considered a bad debt and uncollectable.

Foods R Us, the only supplier to Roadrunner Food Services, offers a 4 per cent discount if its customers pay by the 15th day of the following month. Ross always takes advantage of this discount. Cash payment for operating expenses are expected to be $85 000 per month for November and December. The expected cash balance on 1 November is $10 000.

Required

a. Explain to the owner of Roadrunner Food Services why a cash budget is important for the business. (3 marks)

b. Prepare a cash budget for the months of November and December 2018. (8 marks)

c. Ross would like to purchase a new vehicle in December. Based on your cash budget what recommendations would you make regarding this purchase? The cost of the vehicle is $40 000. (3 marks)