Question:-Company makes annual credit sales . Credit term is 30 days but

average collection period is 45 days with 0.5% of sales resulting in bad debts. A factor will be engage at an annual fee of 2.5% o credit sales. Company would save 30,000 a year in sales. In administration cost the payment period would be 30 days. The factor would also provide advance of 80% of invoiced debt at an interest rate of 14% , 3% of the base (above). The company can obtain overdraft facility to finance it’s debtor @ of 2.5% over base rate . Factor service should obtain or not?

Sale 1500,000Current

Cost (loan) ( 1500,000x 45/360) =187,500Overdraft 187500x13.5% = 25,312Bad debts (1500,000x0.5/100) = 7,500Administrative cost = 30,000Total cost 62,812

FactoringFactor’s finance (1500,000 x80%) =1200,000Factor’s cost (1200,000 x 14%x1/12) = 14,000Factor’s fee(1500,000 x 2.5%) = 37,500Overdraft (1500,000x 20%) = 30,000Overdraft Cost(300,000x13.5%x1/12) = 3,375Cost 54875_Administrative cost (30,000)_Bad debts (7500)

17375

Question:-The Co. currently expected sales $50,000 in a month variable

cost of sales for $40,000 a month (All payable in the month of sales). It is estimated tat the credit period allowed to debtors were to be increased from 30 days to 60 days. Sales volume will increase by 20%. All customers will be expected take advantage of the extended credit. Cost of capital is 12.5% is the extension of credit period justify it?

Current (1 month) sale 50,000New policy (2months) 120,000Extra investment 70,000

Extra cost. 70,000x 12.5% 8750Extra benefit 10,000x20%x12 24,000Savings 15,250

Working::New policy٭

25

50,000x20%=10,00050,000+10,000=60,000x2=12,000

Question:- $Current annual sales 1800,000Cost of sales is 80% of this amount. But bad debts average of 1% of total sales & the profit is $840,000.

Present policy OptionAdditional sale (%age) __ 25%Collection period 1 month 2monthBad debts (%age) 1% 3%

The company requires 20% return on it’s investment. Cost of sales are 75% variable & 25% fixed. Assume there would be no increase in the fixed cost & there is no increase in the stock and creditors which is the preferable policy?

Present Plicy:Sales 1800,000Variable cost of sales 1080,000

720,000Contribution margin ratio= 720,000 x100 =40%

1800,000

Additional sales 450,000Extra contribution M. (1800,000x25%x40%) 180,000_Extra bad debts ( 2250,000٭ x3%)_18,000 49,500 Profit 130,500Current + Addition = 1800,000+450,000 = 2250,000٭

New debtor =2250,000 x 2/12 375,000_Current debtor =1800,000x2/12 150,000Cost = 225,000 x20% =45,000 225,000

Increase in profit 130,500Less: Increase in cost 45,000Saving 85,500

Management of Trade CreditorsThe management of trade creditors involves

1- Attempting to obtain satisfactory credit from suppliers.2- Attempting to extent credit during periods of cash shortage.

26

3- Maintaining good relations with regular (& bottom) important suppliers.Question:-

Credit term is offered 2/10,n/45 2% cash discount. Explain, assuming that 1000 worth of goods were purchased & Co. is earning 25% annual return.

=1 _ 100 365/35

100 -2

=1 _ 1.23 =23%At 10 days =23% profit

=980 x 25/100 x35/365= 23.49= 1000_23.49=976

After 45 days =976 PaymentAt 10 days =980

Stock:Economic order quantity:

EOQ = 2 COD CH

Co =Cost of orderingD =Demand of goodsCH =Handling costQuestion:-

Demand for a commodity is 40,000 a year. It cost 20 dollar to place and order &$40cents to hold a unit in a year. Find the order size to minimize stock cost, the number of orders. Placed each year & the length of stock cycle.

EOQ = 2 COD CH

= 2x20x40,000 0.4

EOQ =2000 unitsNo. of orders = 40,000 =20

2,000Length of cycle =365 =18.25days

20Cost =($20x20) + (2000/2 x 0.4)

=400+400 = $800

Question:-Purchase price $96 per unit annual demand 4000 unit ordering

cost $300. Annual holding cost is 10% of purchase price. EOQ 500 units should the Co. order 1000 units at a time in order to secure 8% discount?

27

At 500 UnitsPurchase price = 4000x96 =384,000Holding cost =500/2 x$9.6 = 2,400Ordering cost =4000/500 x$300= 2,400

388,800

At 1000 UnitsPurchase price =4000x $88.32 =353280Holding cost =1000/2 x $8.8 = 4400Ordering cost =4000/1000 x$300 = 1200

358880

Question:- If recorder level is 4 unit & there is a probability of 0.2 that demand during lead time would be 5 units & 0.05 that demand would be 6 unit. Find out expected number of stock out?

(5 – 4 x0.2) + (6 – 4 x 0.05)=0.2 + 0.1 =0.3

Question:-The annual demand for an item of stock is 45 unit@ $200/unit. The holding cost for one unit for one year is 15% of the unit cost & ordering cost is 300/order. The suppliers offer a 3% discount for orders of 60 units or more & the discount o 5% for orders of 90 units or more . What is the cost minimizing order quantity?

EOQ = 2 x 13,500 x451350

EOQ = 1215,000 =30units 1350

Cost =Purchase =(45x200) =9000200x15%=30=Holding cost =($30x30units/2) = 45045/30 = 1.5 =Ordering cost =($300x1.5) = 450

9900

3% Discount:-Cost =Purchase (45x194) =8730194x15% =Holding cost (29.1x60/2) = 873

Ordering cost (300x45/60) = 225 9828

5% Discount:-Cost =Purchase (45x190) =8550190 x 15% =Holding cost (28.5x90/2) = 855

Ordering cost ($300x45/90) =1500 9982

28

Just In TimeA method to reduce the level of inventory by obtaining goods

from suppliers by the latest possible time when they are needed thus the benefit will be:1- Reduction in stock holding cost.2- Reduce manufacturing lead time.3- Improve labor productivity.4- Reduce scrape/ re-work.

Investing Surplus CashA cash surplus is likely to be temporary but while it exist the Co.

should invest all deposit the cash bearing following in mind:1- Liquidity2- Profitability3- Safety

Sources of FinanceEquity Financing

Sources of Equity funds:-1- New shares2- Right shares3- Retained earningReasons for seeking a stock market listing1- Access to wider pool of finance.2- Improved marketability of shares.3- Transfer of capital to other use.4- Enhancement of company image.Underwriters:-

Underwriters are the companies or persons with whom company contact for the sale of shares. If shares are not sold then, he purchase them.Question:-

A Co. can achieve a profit after tax of 20% the capital structure is as follows, 200,000 shares @ $1=$200,000 , Retained earning $100,000. Directors proposed to is an additional $12,6000 from right issue. The current market price is 1.80. Required: Calculate the number of shares that must be issued if the right price is $1.6, $1.5 , $1.4 , $1.2.

300,000 x20% =$60,000Per share value =60,000/200,000 =$0.30Right issue:-

800,000 + 126,000 =426,000426,000 x 20% =$85,200

Per share price =85200/326,000 =$0.26Right price No. of shares EPS1.60 126,000/1.60 =78,750

85,200/200,000+78,750=0.311.50 126,000/1.50=84,000 85,200/284,000 =0.301.40 126,000/1.40=90,000 85,200/290,000

=0.29

29

1.20 126,000/1.20=105,000 85,200/305,000=0.27

Dilution EPS:0.31 – 0.30 =0.10.30 – 0.30 =00.29 – 0.30 =-0.10.27 – 0.30 =-0.3Diluted earning per share:-

After the issuance or redemption of shares what will be the diluted earning per share.

Value of RightThe Co. has 100,000 ordinary shares of $1 each having

market price of $2.1, Co. decided to make a right issue of 1 new share at $1.5 for every 4 shares held. After the announcement the share price fell to $1.95, but then recovered to $2 before ex-right. The market value just before the issue is known as the cum right price. What is the theoretical ex-right price?

Theoretical ex-right price =____1_____(N x Cum-right price)+Issue price N+1

(N= No. of shares required to buy 1 share)Value of right =___1____ (4x2) + 1.5

4+1=__1__ (8+1.5) 5=9.5 / 5=$ 1.9“OR”

4 shares from market =4x2 =81 share from Co. =1.5/9.5

=9.5/5=$1.9

QuestionThe Co. has issued 3000,000 ordinary shares @ $1 each. Current

market price is $4 per share each. Co. offer to buy 1 share @$3.20 for every 3 shares held . A shareholder who owns a 900 shares thinks that he will suffer a loss in his personal wealth because the new share are being offered @ a price lower than market price on the assumption that the actual price of shares will be equal to theoretical ex-right price. What would be the effect non the share holders wealth of:-

1- He sells all the right.2- He does nothing at all.3- He exercise half the right & sells the other half.

Theoretical ex-right price =___1___(3x4)+3.20 3+1=__1__(12+3.20)

30

4=15.20 4=$3.80

Value of right =$3.80 _ $3.20=$0.60

Per share tight price =0.60/3=$0.20

Right Issue1:- 300x0.6 900x0.20

=180 =180

Shareholder’s wealth900x380 =3420 + 180 =$3600

Market price900x4 =$3600

No Loss =3600 _ 36002:-

900x4 =3600900x3.80 =3420/180

Loss “Decrease in wealth”3:-Right share sale =150x0.6 =90Value of share =1050x3.80 =3990

4080Shares held =900x4 =3600More investment =150x3.20 =480_

4080Question:-

Company has 600,000 shares issued & Co. making regular annual profit after tax of 300,000. Share price is $5. A proposal has been made to issue 200,000 new shares in right issue @ $4.50 per share. The funds would be used to redeem 900,000 of 12% debentures. The rate of corporation tax is 30%. What would be the predicated effect of the right issue on the share price & would you recommend that the issue should take place.

Earning 300,000Investment saved:900,000x12% 108,000Tax 30% 324,000 75,600Anticipated profit 375,600

No. of shares 600,000+200,000=800,000

EPS =___Profit______ No. of shares=375,600 =0.4695

31

800,000Theoretical ex-price =___1___(3x5) +4.50

3+1=__1__ x19.5 4=$4.875

P/E =_MP_ Price earning ratio EPS=4.875 =10.38 0.4695

Before issue:- EPS =300,000

600,000=$0.5

P/E =5/0.5 =$10As the EPS & P/E ratio decreases so it will decrease the wealth of the

shareholders. So, it is not beneficial.

DEBT FINANCING(Right Shares)

The choice of debt financing that a company can make depends upon:-1- The size of the business.2- Duration of loan.3- Fixed or floating rates.4- Security that can be offered.

Factors Influencing the ChoiceOf Debt Financing

1-Availability:-If the Co. want to make a public issue of loan stock then

the Co. should be a Public Ltd. Company i.e.: other than Public Ltd. Companies can not issue the loan stock to the public in general. They have to seek the debt financing from their banks.

2-Duration:-If the finance is to purchase the/a particular asset that will

generate revenue after a specific period of time than the length of loan should match the length of time that the asset will generate.3-Fixed or floating rates:-

The company has to determine the movement of interest rates if it is going to decide to obtain the loan on floating interest rates.

Before going to apply for the loan as the fixed floating rate will be more expensive if the interest rates are expected to be decreased in the future period.4-Securities & Covernants ( Restrictions )

The choice of finance may be determined by the asset that the business is willing to offer as security & also the restrictions that the lender wish to impose.5-Loan stock:-

32

Loan stock such as bonds or debentures mat be issued as redeemable or irredeemable & they may be issued as floating rate debenture or loan zero coupon bonds, convertible loan stock,. Loan stock is ling term debt capital raised by the Co. for which interest is paid.

Advantage of Debentures over Preference Shares.

1:- Debentures are cheaper form of finance as compared to preference shares as the debenture interest is tax deduct able2:- Debentures are more attractive to the investors as they are secure on the asset of the company.3:- Debenture holders are ranked above the preference shareholders in the event of liquidation.4:- Issuing cost of debentures will be lesser than the preference shares.

Zero Coupon Bond:-“Zero coupon bands are bonds that are issued at a discount to their

redemption value but no interest is paid on them.”The advantages for borrower is that zero coupon bond can be used to

raise cash immediately & their will be no cash payment until the redemption date.

1:-The advantages for lenders is restricted unless the rate of discount on the bond gives a high yield.

2:-The only way of obtaining cash is to sell the bond before maturity.Redemption of loan stock:-

Loan stock is issued for a specific period most of the loan stock have an earliest and the latest redemption rate.Example:

10% Debenture stock 2007-2009 is redeemable at any time b/w the earliest date that is 2007 and the latest date that is 2009. Some loan stock are irredeemable they can be redeem on the option of issuing company in this regard there is no obligation in the part of the company that it do so.

Convertible loan stock:-Convertible loan stock is fixed return securities that may be converted

on predetermined rate & on the option of holder into the common stock on predetermined rate.Question:-

The 10% convertible loan stock is quoted @ $142 per $1000 is nominal. The earliest date for conversion is in 4 years time @ 30 ordinary share per $100 nominal loan stock. The share price is currently $4.15. Annual interest on the stock has just been paid.

Requirement:What is the average annual growth rte in share price, that is

required for the stockholder to achieve an overall rate of return of 12% a year compounded over the next 4 years including the proceeds of conversion?Year Rate Factor Present Value

1 12% 0.893 $12 12% 0.797 $1

33

3 12% 0.712 $14 12% 0.636 $1Year Investment Interest Factor Value

0 142 10% 1 (142)1 __ 10% 0.893 2.932 __ 10% 0.797 7.973 __ 10% 0.712 7.124 __ 10% 0.636 6.36__

111.62Money value that to be needed after 4 year

=111.62 =175.5 0.636

Value of Shares30x4.15 =124.5

Growth level =175.5 =1.4096 124.5

(1+g)n =Growth(1+g)4 =(1.4096)(1+g)4x1/4 =(1.4096)1/4

1+g =1.0896g =1.0896 – 1g =0.0896 g = 8.96%

The growth rate of share price should be 8.96% so that we not have to bear loss. Problem of financing SME 13.338P.V =___109____ =__109__ =$91.74

(1+0.09)2 1.1881P.V =1000,000 =1000,000 =385,543

(1+.10)10 2.593P.V =_3000_ =2572

1.1664

Perpetuities:-“An ordinary annuity whose payments or receipts continue for

ever.”Annuities:-

“A series of equal payment or receipts occurring over a specified number of periods. In ordinary annuity payments or receipts occur at the end of each period while in annuity due payment or receipts occur at the beginning of each period.Question4-4:-

F. Managers rely more on present value than future value as the decisions are made before the start of project & we have to evaluate that the future value’s cash flow should be greater than the cash out low at the zero period.

34

Question 4-5:-a:- 1500x1.225 =1837.5

1500x1.501 =2251.51500x1.838 =2757

b:- FV3 =1837.5Interest =FV3 – PV =1837.5-1500 =337.5Interest =FV6–FV3 =2251.5-1837.5=414Interest =FV9-FV6 =2757-2251.5 =505.5

c:- It is interested compounded

Question4-7:-=10,000 x (1+0.09)40 =314094=10,000 x (1+0.09)30 =132676More amount so it is better 181418

Blockbuster Entertainment Corporation operates under the name Blockbuster Video and is engaged primarily in the business of renting videotapes. The following selected data are from a recent annual report.(Dollar amounts are stated in thousands.)

Beginning of End of the

the year year

35

Total current assets $54,130 $92,592Total current liabilities 63,481 83,357Total assets 234,698 417,413Total stockholder equity 124,050 208,180Operating income 76,141Net income 44,152

The company has long-term liabilities that bear interest at annual rates ranging from 11 percent to 16 percent.Instructions:-a. Compute the company’s current ratio at (1) the beginning of the year and

(2) the end of the year. (Carry to two decimal places.)b. Compute the company’s working capital at (1) the beginning of the year and (2) the end of the year. (Express dollar amount in thousands)c. Is the company’s short-term debt-paying ability improving or deteriorating? As short-term creditor, would you consider the company to be as good a credit risk as, say. BellSouth regional telephone company with a current ratio of 9 to 1? Explain.d. Compute the company’s (1) return on average total assets and (2) return

on average stock holder’s equity.(Round average assets and average equity to the nearest dollar and final computations to the 1 percent.)

e. As an equity investor, do you think that Block buster’s management is utilizing the company’s resources in a reasonably efficient manner? Explain.

Listed in the left hand column is a series of 12 business transactions and events relating to the activities of Anderton Industries. Opposite each transaction is listed a particular ratio used in financial analysis.

Transaction Ratio

(1) Purchase inventory on open account Quick ratio(2) A larger physical volume of goods was sold at smaller unit prices. Gross profit

percentage(3) Corporation declared a cash dividend. Current ratio(assume ratio

is greater than 1:1)

(4) An uncollectible account receivable was written off Current ratio (assume ratio is

against the allowance account. greater than 1:1)(5) Issued additional shares of common stock and used proceeds Debt ratio to the retire ling-term debt.(6) Paid stock dividend on common stock in common stock Earnings per share(7) Conversion of a portion of bonds payable into common stock Interest coverage ratio (ignore common taxes)(8) Appropriated retained earnings Rate of return on stockholder’s

equity(9) During period of rising prices, company changed from FIFIO Inventory turnover to LIFO method of inventory pricing(10) Paid a previously declared cash dividend Debt ratio(11) Purchased factory supplies on open account Current ratio(assume ratio is

greater

36

than1:1)(12) Issued shares of capital stock in exchange for patents Debt ratio

Instructions:-What effect would each transaction or event have on the ratio listed opposite to it? That is, as result of this event would the ratio increase, decrease, or remain unchanged? Your answer for each of the 12 transactions should include a brief explanation.

1- As inventory is not the part of quick ratio, so there is no effect on quick asset, quick liabilities increases in it so the quick ratio decreases.

2- Gross profit percentage decrease because the goods was sold at smaller unit price.

3- Liability increase as cash dividend decreased.4- No effect because there is no change of A/R.5- Debt ratio decreases as we issue shares so stock/equity increase & debt

decreases.6- EPR decrease because no. of shares increase but net income remains the

same.7- As we convert the bonds into C. stock so ratio improve because now we

have not to pay a interest on bonds ratio.8- No effect because there is no effect on net income & stockholder’s equity.9- Inventory turnover ratio increases because CGS increases.

10- Debt ratio decreases because debt decreases.11- C. Ratio increases because A/R increases ,A/P increase so C.L also increase

& C.R decreases.12- Ratio decreases because equity increase.

Cash Collection From SaleApril May June

Sale 60,000 72,000 90,000Cash sale(60%) 36,000 43,200 54,000Collection fromCredit sale(4%)March 20,000 April 24,000 May ______ ______ 28,800

56,000 67,200 82,800

Market price of Co. common stock increased from 24 to 30. Earning per share remains the same.Price earning ratio = Common stock per share Earning per sharePrice earning ratio increase because now we have to in invest Rs.12 to each Rs.1 so it is unfavorable.Declared & paid the dividend.Earning per share = Net income x100

37

No. of shares=50,000 x100 =5x100 10,000No effect on the EPS because dividend not include in it.Issued bonds at the interest rate 8%.Return on equity = Net profit_______x100 Shareholder’s equityNet income due rate of interest so the shareholder’s equity also , so, there is decrease effect on the return on equity.=1000 =10% 990 =9.9% 10,000 9,990Net income decreased by 10% with respect to last year.Interest average ratio =Income before interest & income tax expenses Interest expense=10,000 =10% =9,000 =9% 1,000 1,000As the net income decrease which reflect that we have minimum to pay the interest as compare to last year.Paid a previously decreased cash dividend.Current ratio =Current Asset Current Liability=100,000 =2.5:1 40,0005,000 Cash dividend=95,000 =2.7:1 35,000Current ratio increases due.Absolute inventory totaling 10,000 was written off as lose – inventory turnover ratio-- ?Inventory T.O =_____CGS_____

A. Inventory=10,000 =10 100,000=10,000 x100 =11 9,000Inventory T.R increase but its because of loss which does not provide profit to Co. So it is not a good sign for the company.Long term loan is required & utilized to purchase the existing shares in the market.Debt to equity =__Debt__ Equity=100,000 =0.5:1 200,000=150,000 =1:1 150,000Purchase equity, issue equity.Debts to equity ratio increase because debts increase with 50,000 & equity with 50,000 same .

38

Return on equity =Net income x100 Equity=50,000_ =0.33x100 =33% 150,000=50,000__ =0.35x100 =35% 140,00010% interest on 10,000 loan =49,000__ =0.35x100x35% 140,000Ratio increases because income decreases & equity also decrease.Sold inventory for cash at a profit of 25%=Current ratio =50,000 =2:1 25,000Ratio improve because inventory decrease with 10,000 & cash increase with 12,500.Credit sold inventory (A/R )So, ratio increase (same case)Paid the A/PDebt to equity =Debt____ Equity=50,000_ =0.5:1 100,000 A/P =10,000=40,000__ =0.4:1 100,000 Ratio decreased.Purchase inventory on AccountDebt – Equity =Debt_ Equity=50,000 =0.5:1 100,000 A/P =10,000=60,000 =0.6:1 100,000Ratio increase because Debt increase. Asset test ratio =Quick Asset (C.A – Inventory) C. Liabilities=50,000 =0.5:1 100,00010,000=50,000 =0.45:1 110,000Decrease ratio

39

Question:1Sales Budget

April May June JulyBudget sales in units 10,000 40,000 20,000 15,000Selling price per unit 20 20 20 20

200,000 800,000 400,000 300,000

Cash sales 40% 80,000 320,000 160,000 120,000Credit sales 60% 120,000 480,000 240,000 180,000

Collection from Sale:-April May June July

Opening balance 30,000 __ __ __40% Cash in hand 80,000 320,000 160,000 120,00070% of credit sale 84,000 336,000 168,000 126,00025%of credit in following month _----_ 30,000 120,000 60,000Total cash collection 194,000 686,000 448,000 306,000

Production BudgetApril May June July Total

Sales in unit 10,000 40,000 20,000 15,000 70,000+Desired ending inventory 15% 6,000 3,000 2,250 750 2,250Total need 16,000 43,000 22,250 15,750 67,750- Opening inventory 5,000 6,000 3,000 2,250 5,000Required production 11,000 37,000 19,250 13,500 67,250

Material BudgetApril May June July

Production 11,000 37,000 19,250 13,500Material per unit 10 10 10 10Production need 110,000 370,000 192,500 135,000+Desired ending material 10% 37,000 19,500 13,500Total need 147,000 389,500 206,000_Opening material unit 10,000 37,000 19,500Purchase material 137,000 350,500 186,500

40

Matrix Company is preparing budgets for the quarter ending June30. Budgeted sales fort the next free months are:

o April 10,000 unitso May 40,000 unitso June 20,000 unitso July 15,000 unitso August 5,000 units

The selling price is $20 per unit Sales are 40% cash & 60% credit Matrix’s collection pattern is:

o 70% collected in the month of saleo 25% collected in the month following sale,o 5% uncollectible.

The March 31 accounts receivable balance of $30,000 will be collected in full. The management at Matrix Company wants ending inventory to be equal to 15% of

the following month budgeted sales in the units. On March 31 , 5,000 units were on hand At Matrix Company, ten pounds of material are required per unit of product Management wants materials on hand at the end of each month equal to 10% of the

following month production. On March 31, 10,000 pounds of material are on hand. Material cost is $0.50 per

pound. One-half of a months purchases is paid for the month of purchase: the other half is

paid in the following months. The March 31 accounts payable balance is $12,000 At Matrix, each unit of product requires 0.10 hours of direct labor and the hourly rate

is $10. For the next three months , the direct labor works for will be paid for a minimum of

1500 hours the month At Matrix manufacturing overhead is applies to units of product on the basis of direct

labor hours. The variable manufacturing overhead rate is $20 per direct labor hour. Fixed manufacturing overhead is $15,000 per month & includes $20,000 of non-cash

cost(primarily depreciation of plant assets. At Matrix, the selling & administrative budget is divided into variable & fixed

components the variable selling & administrative expenses are $0.50 per unit sold. Fixed selling & administrative expenses are $ 70,000 per month. The fixed selling & administrative expenses include $10,000 in costs---primarily

depreciation--- that are not cash outflows of the current month. Maintains a 60% open line of credit for $75,000 Maintains a minimum cash balance of $30,000 Borrows on the first day of month and repays loans on the last day of the month. Pays a cash dividend of $ 49,000 in April. Purchases $ 143,000 of equipment in May and $48,000 in June paid in cash Has an April 1 cash balance of $ 40,000

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

41

Current Assets as of March31:

Cash $8,000Accounts Receivable $20,000Inventory $36,000Building and Equipment $120,000Accounts Payable $21,000Capital Stock $150,000Retained Earning $12,250

a. The gross margin is 25% of sales.b. Actual and budget sales data:March (actual) $50,000April $60,000May $72,000June $90,000July $48,000c. Sales are 60% for cahs and 40% on credit. Credit sales are

collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.

d. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.

e. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases inventory

f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets).

g. Equipment costing $1,500 will be purchased for cash in April.h. The company must maintain a minimum cash balance of $4,000.

An open line of credit is available at a local band. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month; borrowing must be in multiples of $1,000. The annual interest rate is 12%. Interest is paid only at the time of repayment of principal; figure interest on whole months (1/12 , 2/12 , and so forth).

REQUIRED: Using the preceding data:

1- Schedule of Expected Cash Collection from Sales.2- Merchandise Purchase Budget and Cash disbursements for Purchases.3- Cash disbursement Budget for Operating Expenses.4- Cash Budget.

Completing a Master BudgetHillyard Company, an office supplies specialty store, prepares its

master budget on a quarterly basis. The following data have been

42

assembled to assist in preparing the master budget for the first quarter:

Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

a. As of December31 ( the end of the prior quarter), the company’s general ledger showed the following account balances:

Debit $ Credit $Cash 48,000Accounts Receivable 224,000Inventory 60,000Building and Equipment Net 370,000Accounts payable 93,000Capital stock 500,000Retained earning 109,000

702,000 702,000b. Actual sales for December and budgeted sales for the next

four months are as follows:December (actual) $280,000January $400,000February $600,000March $300,000April $200,000

c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sales. The accounts receivable at December 31 are a result of December credit sales.

d. The company’s margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.

e. Monthly expenses are budget as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter.

f. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

g. One-half of a month’s inventory purchases is paid for in the month of purchase’ the other half is paid in the following month.

h. During February, the company will purchase a new copy machine for $1,700

43

44