Question - Mary also provided you with third quarter monthly expense data to assist in constructing your budget. The next table presents that information:
|
Monthly Expense Item
|
Amount
|
|
Administration
|
$2,500
|
|
General
|
6% of sales
|
|
Commissions
|
12% of sales
|
|
Depreciation
|
$850
|
She concluded that, "As you know, we pay our operating expenses in the month we accrue them."
Procurement officer Jim Washburn managed inventory so that its ending balance equaled 80% of the next month's cost of goods sold. He also stated that the accounts payable clerk pays one-half of each month's inventory cost in the month of acquisition, and the remaining 50% in the following month.
Ashleigh McNamara, head of capital expenditures, informed you that Zen will make a cash purchase of $1,500 worth of hand-held scanning devices in early October. Per corporate policy, the firm will depreciate this equipment over thirty months on a straight-line basis. Ashleigh added, "They'll be useless at the end of that time, so we will scrap them."
In your role as CFO, you insist that Zen maintain an ending monthly cash balance of $4,000 in order to remain financially flexible. The company has an open line of credit with its banking partner to ensure that it can meet its cash balance goal. This agreement mandates a 12% annual interest rate for all short-term borrowings. Financing must take place at the beginning of the month in thousand dollar multiples. Repayments of borrowing must also occur in thousand dollar increments, and the bank only accepts interest payments when Zen repays principal. Principal repayments and interest payments occur at the end of a month (funds permitting).
Required: Compose a memorandum to Zen's management team that highlights the key aspects of the 2017 fourth quarter operating budget. Supplement your summary with budgetary schedules and attach them to the executive summary. The budgetary flow that you select is as follows:
- Cash collections
- Inventory purchases
- Cash disbursements for purchases
- Cash disbursements for operating expenses
- Overall cash budget (collections, disbursements, and financing)
You construct each of the above budgets on a monthly and quarterly basis. You may find it beneficial to construct your budgetary schedules in the manner presented in this chapter.
Finally, you conclude your budgets with a projected (pro-forma) income statement for the fourth quarter and a pro-forma balance sheet as of December 31. The company has a zero percent income tax rate, due to previous tax losses.