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Cash Budget


QUESTION 2 (4 + 11 + 2 + 2 = 19 marks) Joye and Paul (owners of the business) wish to prepare a budget for the two months ending 30 September 2015 for a gift shop operating as ‘Gifts Galore’. The following information is provided. 2015 Actual credit sales Actual inventory purchases on credit Actual Expenses (including depreciation) June $600 000 $400 000 $95 000 July $625 000 $470 000 $105 000 2015 Estimated credit sales Estimated inventory purchases on credit Estimated Expenses (including depreciation) August $520 000 $295 000 $82 000 September $480 000 $380 000 $81 000  Sixty percent of sales are collected in the month of sale and forty percent in the month following the sale.  Inventory is paid for in the month following delivery. Inventory on hand is kept to a minimum.  The expenses are paid in the month when they are incurred. Depreciation is $5000 per month.  Joye and Paul are planning to refurbish the shop at an estimated cost of $50 000. $10 000 will be paid as a deposit in August and the balance will be paid in September, when the work is completed.  Joye and Paul each take out $4000 in cash per month for personal use.  The bank balance on the 1 August 2015 is $18 000. REQUIRED: a) Prepare a schedule showing collections from debtors for August and September 2015. b) Prepare a cash budget for ‘Gifts Galore’ showing the monthly balances for August and September 2015. (Note it is not necessary to include a total column for the two month period in the budget) c) On 30 September 2015 a loan of $100 000 is due for repayment. Will Joye and Paul be able to repay the loan when it falls due? Explain. d) Assuming that Joye and Paul will not have sufficient cash to repay the loan, list three suggestions of things they could do to improve their liquidity.