Question 1 (20 marks) You are the assistant to the CEO of Shatin Enterprises, a wholesale distributor of consumer goods.

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Question 1 20 Marks You Are The Assistant To The Ceo Of Shatin Enterprises A Wholesale Distributor Of Consumer Goods 1 (400.11 KiB) Viewed 44 times

Question 1 (20 marks) You are the assistant to the CEO of Shatin Enterprises, a wholesale distributor of consumer goods. You are assisting the CEO in the planning and budgeting process. At March 31 Shatin Enterprises partial balance sheet reveals the followings: Current assets as of March 31: Cash Accounts receivable Inventory Accounts payable $50,000 $30,000 $72,000 $43,500 The actual and budgeted sales data are as follows: March (actual) April May June July $100,000 $120,000 $150,000 $180,000 $160,000 . . Other information regarding the company's operations follow: The cost of goods sold is 75% of sales. Sales are 70% for cash and 30% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales. Shatin has a policy that each month’s ending inventory should equal to 80% of the following month's budgeted cost of goods sold. One-half of a month's inventory purchases is paid 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 of inventory. • Selling and administrative expenses are budgeted at $12,000 per month. Assume that these expenses are paid monthly. Equipment costing $39,000 will be purchased for cash in April. Dividends of $9,750 will be declared and paid in May. Management would like to maintain a minimum cash balance of at least $40,000 at the end of each month. The company has an agreement with a bank that allows the company to borrow at the beginning of each month, up to a total loan balance of $150,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. . . Required: a. Prepare a schedule of expected cash collections for April, May and June. (3 marks)
b. Prepare an inventory purchases budget and a schedule of expected cash disbursements for inventory purchases for April, May and June. (6 marks) c. Prepare a cash budget for April, May and June. (6 marks) d. The CEO asked you about the concept 'budgetary slack’ and wondering why is it so common to find slack in budgets. Explain to him in detail. (5 marks)