All sales are on credit. Recent experience shows that 22% of credit sales is col
ID: 2654722 • Letter: A
Question
All sales are on credit. Recent experience shows that 22% of credit sales is collected in the month of the sale, 48% in the month after the sale, 27% in the second month after the sale, and 3% proves to be uncollectible. The product’s purchase price is $110 per unit. All purchases are payable within 13 days. Thus, 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 23% of the next month’s unit sales plus a safety stock of 105 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,896,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $130,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $130,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is $47,500, and the company’s cash balance is $130,000. (Round final answers to the nearest whole dollar.)
1. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.
Aztec Company sells its product for $160 per unit. Its actual and projected sales follow.Explanation / Answer
The inventory closing balance for April = 105 units + (23% x May Sales in units) = 565 units
The inventory opening balance for May = The inventory closing balance of April = 565 units
The inventory closing balance for May = 105 units + (23% x June Sales in units) = 1600 units
Purchases during May = Sales – Opening Stock + Closing Stock = 2000 – 565 + 1600 = 3035 units.
Purchases amount for May = 3035 x 110 = $333850
The inventory opening balance for June = The inventory closing balance of May = 1600 units
The inventory closing balance for June = 105 units + (23% x July Sales in units) = 1945 units
Purchases during June = Sales – Opening Stock + Closing Stock = 6500 – 1600 + 1945 = 6845 units.
Purchases amount for June = 6845 x 110 = $752950
The inventory opening balance for July = The inventory closing balance of June = 1945 units
The inventory closing balance for July = 105 units + (23% x August Sales in units) = 956 units
Purchases during July = Sales – Opening Stock + Closing Stock = 8000 – 1945 + 956 = 7011 units.
Purchases amount for July = 7011 x 110 = $771210.
Interest on loan for June = 12% x 47500 / 12 = $475.
Interest on loan for July = 12% x (47500-5815) / 12 = $416.85 = $417.
Cash Budget June July Beginning Balance 130000 130000 Add: Collection of month prior to Previous month Sales 27% 367200 86400 Add: Collection of Previous month Sales 48% 153600 499200 Add: Collection of Current month Sales 22% 228800 281600 Less: Payments of Purchase of Previous month 40% 133540 301180 Less: Payments of Purchase of Current month 60% 451770 462726 Less: Selling and Aministrative Expenses 158000 158000 Less: Interest on Loan @ 12% 475 417 Closing Balance after Expenses 135815 74877 Less: Loan repaid 5815 Nil Add: Borrowings Nil 55123 Minimum Cash Closing Balance 130000 130000