Problem:
Angelo Diaz has decided to go into business selling colorful scarves which are popular among university students. He will operate the business out of a flea market, mostly on weekends. He is trying to get himself organized for the start of the first quarter. In order to do so, he will have to prepare a few budgets. Use the following information to help him achieve his goal
Angelo estimates expected sales for January to be £800, February £1200, March £2000 and April £3,000. Gross profit ratio is 0.4. Sixty percent of the next month's sales should be kept in ending finished goods inventory.
Angelo has decided to pay himself a monthly salary of £150. He will pay his best friend £60 to help him with miscellaneous errands. He estimates that general operating costs will be £130 monthly. In addition, since his cousin is the owner of the flea market, he will only pay £100 per month in rent. Upgrading of the space will cost £500, of which £200 will be paid in January and £300 in February. All other costs must be paid for as incurred. He will begin January with £400 in the bank. Forty percent of sales are paid for in cash. The rest is put on credit: 5% of credit sales will not be received, 30% will be paid in the month of sale and 10% of those who pay in the month of sale will qualify for a 20% discount. Another 20% will be received the month following the sale and 5% the second month following the sale.
Thirty percent of the payments for merchandise are made in the month of purchase and the remaining 70% are made in the month following the purchase.
Interest is charged at a rate of 24% per year and payments of interest only are due at the end of each quarter. All loans are borrowed at the very beginning of the month and payments are made at the very end of the month. Angelo must maintain a minimum cash balance of £1,000.
Complete the following:
Help Angelo by completing the following:
1. Prepare a schedule of cash receipts for the first quarter.
2. Prepare a schedule of inventory purchases for the first quarter.
3. Prepare a schedule of cash disbursements for the first quarter.
4. Prepare a cash budget for January and February.
5. How much interest is owed on February 28?