Prepare a cash budget for January, February, and March. List and explain five (5) importance of a cash-budget. You are required: to Calculate Donald Corporation Current ratio, Quick ratio, and Cash ratio

The debtor settlement pattern is 60% in the month of sale, 25% the month following, and 15% the second month following.

• January Collections:

  • From November sales ($15\%$ of N 80,000): $0.15 \times 80,000 = \text{N } 12,000$
  • From December sales ($25\%$ of N 90,000): $0.25 \times 90,000 = \text{N } 22,500$
  • From January sales ($60\%$ of N 75,000): $0.60 \times 75,000 = \text{N } 45,000$
  • Total January Collections: $\text{N } 12,000 + \text{N } 22,500 + \text{N } 45,000 = \text{N } 79,500$

• February Collections:

  • From December sales ($15\%$ of N 90,000): $0.15 \times 90,000 = \text{N } 13,500$
  • From January sales ($25\%$ of N 75,000): $0.25 \times 75,000 = \text{N } 18,750$
  • From February sales ($60\%$ of N 75,000): $0.60 \times 75,000 = \text{N } 45,000$
  • Total February Collections: $\text{N } 13,500 + \text{N } 18,750 + \text{N } 45,000 = \text{N } 77,250$

• March Collections:

  • From January sales ($15\%$ of N 75,000): $0.15 \times 75,000 = \text{N } 11,250$
  • From February sales ($25\%$ of N 75,000): $0.25 \times 75,000 = \text{N } 18,750$
  • From March sales ($60\%$ of N 80,000): $0.60 \times 80,000 = \text{N } 48,000$
  • Total March Collections: $\text{N } 11,250 + \text{N } 18,750 + \text{N } 48,000 = \text{N } 78,000$

The purchase settlement pattern is 90% in the month of purchase and 10% the month after.

• January Payments for Purchases:

  • From December purchases ($10\%$ of N 60,000): $0.10 \times 60,000 = \text{N } 6,000$
  • From January purchases ($90\%$ of N 55,000): $0.90 \times 55,000 = \text{N } 49,500$
  • Total January Payments: $\text{N } 6,000 + \text{N } 49,500 = \text{N } 55,500$

• February Payments for Purchases:

  • From January purchases ($10\%$ of N 55,000): $0.10 \times 55,000 = \text{N } 5,500$
  • From February purchases ($90\%$ of N 45,000): $0.90 \times 45,000 = \text{N } 40,500$
  • Total February Payments: $\text{N } 5,500 + \text{N } 40,500 = \text{N } 46,000$

• March Payments for Purchases:

  • From February purchases ($10\%$ of N 45,000): $0.10 \times 45,000 = \text{N } 4,500$
  • From March purchases ($90\%$ of N 55,000): $0.90 \times 55,000 = \text{N } 49,500$
  • Total March Payments: $\text{N } 4,500 + \text{N } 49,500 = \text{N } 54,000$

Note: Overheads are N 20,000 per month, including N 5,000 depreciation. Cash overheads are N 15,000 (20,000 - 5,000).

$$\begin{array}{|l|r|r|r|} \hline \textbf{Item} & \textbf{January (N)} & \textbf{February (N)} & \textbf{March (N)} \\ \hline \textbf{Opening Cash Balance} & 30,000 & 24,000 & 17,250 \\ \textbf{Cash Receipts:} & & & \\ \quad \text{Collections from Debtors} & 79,500 & 77,250 & 78,000 \\ \quad \text{Insurance Claim} & - & - & 25,000 \\ \textbf{Total Cash Receipts} & \mathbf{79,500} & \mathbf{77,250} & \mathbf{103,000} \\ \textbf{Total Cash Available} & \mathbf{109,500} & \mathbf{101,250} & \mathbf{120,250} \\ \textbf{Cash Payments:} & & & \\ \quad \text{Payments for Purchases} & 55,500 & 46,000 & 54,000 \\ \quad \text{Wages} & 15,000 & 15,000 & 15,000 \\ \quad \text{Overheads (excluding depreciation)} & 15,000 & 15,000 & 15,000 \\ \quad \text{Taxation} & - & 8,000 & - \\ \textbf{Total Cash Payments} & \mathbf{85,500} & \mathbf{84,000} & \mathbf{84,000} \\ \textbf{Closing Cash Balance} & \boxed{\mathbf{24,000}} & \boxed{\mathbf{17,250}} & \boxed{\mathbf{36,250}} \\ \hline \end{array}$$

Question 1b: List and explain five (5) importance of a cash budget.

• Liquidity Management: A cash budget helps in forecasting cash surpluses or deficits, allowing management to plan for short-term borrowing to cover deficits or invest excess cash.
• Financial Planning: It provides a clear picture of future cash flows, which is crucial for overall financial planning and making informed decisions about capital expenditures or dividend policies.
• Performance Evaluation: The budget serves as a benchmark against which actual cash flows can be compared, enabling management to identify variances and take corrective actions.
• Coordination: It integrates various functional budgets (e.g., sales, production, purchases) into a single financial plan, ensuring better coordination and alignment across different departments.
• Control over Cash: A cash budget helps in monitoring and controlling cash inflows and outflows, preventing unnecessary expenditures and ensuring the efficient utilization of cash resources.

Question 2a: Calculate Donald Corporation Current ratio, Quick ratio, and Cash ratio.

Given Information:

• Cash and marketable securities = N 400,000
• Accounts receivable = N 1,200,000
• Inventory = N 2,100,000
• Accrued wages and taxes = N 500,000
• Accounts payable = N 800,000
• Notes payable = N 600,000

Current Assets = Cash and marketable securities + Accounts receivable + Inventory

$$\text{Current Assets} = \text{N } 400,000 + \text{N } 1,200,000 + \text{N } 2,100,000 = \text{N } 3,700,000$$

Current Liabilities = Accrued wages and taxes + Accounts payable + Notes payable

$$\text{Current Liabilities} = \text{N } 500,000 + \text{N } 800,000 + \text{N } 600,000 = \text{N } 1,900,000$$

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$ $$\text{Current Ratio} = \frac{\text{N } 3,700,000}{\text{N } 1,900,000}$$ $$\text{Current Ratio} \approx \boxed{\mathbf{1.95:1}}$$

$$\text{Quick Ratio} = \frac{\text{Cash} + \text{Marketable Securities} + \text{Accounts Receivable}}{\text{Current Liabilities}}$$ $$\text{Quick Ratio} = \frac{\text{N } 400,000 + \text{N } 1,200,000}{\text{N } 1,900,000}$$ $$\text{Quick Ratio} = \frac{\text{N } 1,600,000}{\text{N } 1,900,000}$$ $$\text{Quick Ratio} \approx \boxed{\mathbf{0.84:1}}$$

$$\text{Cash Ratio} = \frac{\text{Cash} + \text{Marketable Securities}}{\text{Current Liabilities}}$$ $$\text{Cash Ratio} = \frac{\text{N } 400,000}{\text{N } 1,900,000}$$ $$\text{Cash Ratio} \approx \boxed{\mathbf{0.21:1}}$$