Brown Limited is a manufacturer of wallets The companys peak

Brown Limited is a manufacturer of wallets. The company\'s peak sales occur in September of each year. The following is the company\'s sales budget for the second quarter: AugustSeptember October Total From past experience, the company has learned that 20% of a month\'s sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. June sales totalled $460,000, and July sales totalled $520,000. Required: (a) Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter. (5 marks) (b) Assume that the company will prepare a budgeted balance sheet as of October 31. Compute the accounts receivable as of that date. (3 Marks) (c) Discuss some of the major benefits to be gained from budgeting. (4 Marks)

Solution

(a) Cash Collection Budget:-

August

September

October

June Sales

(460000 * 10%)

=46000

July Sales

(520000 * 20%)

104000

(520000 * 10%)

=52000

August Sales

(600000 * 70%)

=420000

(600000 * 20%)

=120000

(600000 * 10%)

=60000

September Sales

----

(1000000 * 70%)

=700000

(1000000 * 20%)

=200000

October Sales

----

----

(400000 * 70%)

=280000

Total

570000

872000

540000

(b) Account Receivable as on 31 October:-

From September Sale (1000000 * 10%)

100000

From October Sale (400000 * 30%)

120000

Account Receivable as on 31 October

220000

(c) Benefits:-

(i) This tool helps determine whether cash balances remain sufficient to fulfill regular obligations

(ii) The process of creating a budget takes management away from its short-term, day-to-day management of the business and forces it to think longer-term

(iii) There is only a limited amount of cash available to invest in fixed assets and working capital, and the budgeting process forces management to decide which assets are most worth investing in.

(iv) Cash budgets identify the amount of cash required to fulfill immediate, short-term obligations without utilization of overdraft protection or lines of credit

	August	September	October
June Sales	(460000 * 10%) =46000
July Sales	(520000 * 20%) 104000	(520000 * 10%) =52000
August Sales	(600000 * 70%) =420000	(600000 * 20%) =120000	(600000 * 10%) =60000
September Sales	----	(1000000 * 70%) =700000	(1000000 * 20%) =200000
October Sales	----	----	(400000 * 70%) =280000
Total	570000	872000	540000