Question

Halloween Pty Ltd is preparing a cash budget for the first three months of 2016. Relevant estimates for the budget are as follow:

January February March Sales 260,000 300,000 350,000 Materials Purchases 150,000 185,000 220,000 Salaries and Wages 30,000 30,000 35,000 Selling Expenses 14,500 19,000 22,000 Administration Expenses 20,500 24,800 27,600

Additional information: ? All sales are on credit. Collections are expected to be 50% in the month of sale, 30% in the first month following the sale, and 20% in the second month following the sale. ? 60% of materials purchases are expected to be paid in the month of purchase, and the rest in the following month. ? Administration expense estimate includes $7,000 depreciation of equipment each month. ? Sales in November and December 2015 were $210,000 and $235,000 respectively. ? Materials purchases in November and December 2015 were $100,000 and $125,000 respectively. ? In January, the company expects to receive $4,000 interest from its term deposit. ? In February, the company expects to sell 1,000 of shares for $2.50 per share. ? In March, the company expects to pay $1,500 dividends in cash. ? The company’s manager plans to purchase a new equipment in February for $5,000 cash ? The company’s beginning cash balance was $17,800 in January. REQUIRED: a) Prepare a schedule of receipts from debtors and a cash budget for Halloween Pty Ltd for the three months ending 31 March 2016. ( 5 + 5 = 10 marks) b) As part of its longer term plans, Halloween Pty Ltd is hoping to commence a product reinvention program for one of its core products. The project would require an initial cash commitment of $100,000. The company’s management is hoping to fund this either in February or in March. Does this seem feasible?

please explain in detail

thanks

Answer 1

a)

Schedule of Receipts from Debtors
	January	February	March	Total
Collection of sales for the month of:
November	42000			42000
December	70500	47000		117500
January	130000	78000	52000	260000
February		150000	90000	240000
March			175000	175000
Total receipts	242500	275000	317000	834500

Cash Budget
For the Three Months Ending 31 March 2016
	January	February	March	Total
Beginning cash balance	17800	66300	101000	17800
Add cash collections:
Receipts from debtors	242500	275000	317000	834500
Interest on term deposits	4000			4000
Sale proceeds of shares		2500		2500
Total cash collections	246500	277500	317000	841000
Total cash available	264300	343800	418000	858800
Less cash disbursements:
For material purchases	140000	171000	206000	517000
For salaries and wages	30000	30000	35000	95000
For selling expenses	14500	19000	22000	55500
For administration expenses	13500	17800	20600	51900
For dividends			1500	1500
For equipment		5000		5000
Total cash disbursements	198000	242800	285100	725900
Ending cash balance	66300	101000	132900	132900

Working:

Cash disbursements for material purchases:

	January	February	March	Total
Payment for purchases in the month of:
December	50000			50000
January	90000	60000		150000
February		111000	74000	185000
March			132000	132000
Total payments	140000	171000	206000	517000

b) Funding the initial cash commitment of $100000 for the product reinvention program in February or March is feasible since the available cash exceeds the expected disbursements by over the required amount of $100000.