Question

Mary, Heidi, Steve and, Roger planned to open up a cosmetic distributor outlet in Paris next year.
They are in the process of assembling a cash budget for the first quarter of the year 2020. They asked
you to help them to prepare a cash budget and provide you with the following information:

They will start the business in January 2020, with $90,000 cash as the capital.

They will rent a double-story building. They need to pay a rental deposit of $50,000 in
January. However, they will only start paying the rental in February at $3,000 per month.

In February, they expected to purchase 5 display cabinets at the cost of $10,000 on credit. Only half of the cost will be paid in the month of purchase while the balance will be paid in the following month.

They will employ 3 staff in January, and each of them will be paid $1,600 per month.

Purchases of cosmetics will be made on credit and payment will be made in the following month after purchase. Estimated purchase are as follows:

January	$10,000
February	$15,000
March	$20,000

All sales will be made on a cash basis. Estimated cosmetics sales are:

January	$30,000
February	$35,000
March	$40,000

The allowance for Mary, Heidi, Steve, and Roger will start in March. Every partner will be paid $4,500.

The advertisement expense will be paid by cheque for $10,000 in February.

Required:
a. Prepare a schedule that discloses the business’s total cash collections for January, February, and March 2020.

b. Prepare a schedule that discloses the business’s total cash payments for January, February, and March 2020.

c. Prepare the cash budget for January, February, and March 2020.

d. State FOUR (4) purposes of budget.

Answer 1

(a)

	Jan	Feb	March
Cash collections	30,000	35,000	40,000

(b)

	Jan	Feb	March
Rental deposit	50,000	-	-
Rent	-	3,000	3,000
Display cabinets	-	5,000	5,000
Staff salary	4,800	4,800	4,800
Purchases	-	10,000	15,000
Allowance	-	-	18,000
Advertisement		10,000
Total cash payments	54,800	32,800	45,800

(c) Cash Budget

	Jan	Feb	March
Opening balance	90,000	65,200	67,400
Add: Cash collection	30,000	35,000	40,000
Less: Total cash payments	(54,800)	(32,800)	(45,800)
Closing cash balance	65,200	67,400	61,600

(d) Purpose of budget

1. Helps in determining where the cash was received from, and where all the payments went.

2. Allows you to determine where and how much do you want to spend your money.

3. Helps in avoiding unnecessary payments

4. Helps in saving money to be used for future purposes