50.1K

Verified Solution

Link Copied!

Stanley has been operating as a sole trader for many years with a year end of 31 December. He is preparing a cash budget and provides the following information for the three-month period from July 2019 to September 2019 1 Total income of $120 000 from trade receivables for credit sales will be collected in equal amounts over the three-month period. 2 Cash sales are expected to be 25% of the cash collected each month from credit sales. There will be no trade receivables at 1 July 2019. 3 Total credit purchases of $75 000 will be paid for in equal amounts over the three-month period. 4 Cash purchases are expected to be 20% of the cash paid each month for credit purchases. There will be no trade payables at 1 July 2019. 5 The bank balance on 1 July 2019 is expected to be $3500. Stanley is expected to receive a bank loan of $30 000 on 1 August 2019. Interest will be payable monthly in arrears at 5% per annum. No capital will be repaid until July 2020. New machinery costing $60 000 will be purchased by cheque on 15 August 2019. Stanley's policy is to depreciate machinery at 25% per annum using the straight-line method. A full year's depreciation is charged in the year of acquisition. 8 Stanley rents part of his business premises for $6000 per annum and receives this rental income on a monthly basis. 9 General expenses are paid for in the month following that in which they are incurred. General expenses incurred in June amounted to $6000. These are expected to increase by 5% in July 2019 and a further 5% in August 2019. 10 Stanley makes annual cash drawings of $15000 in equal instalments on 1 January and 1 July each year. Answer the following questions in the Question Paper. Questions are printed here for reference only. (a) Explain three advantages of preparing a cash budget. (b) Prepare the cash budget for each of the three months beginning on 1 July 2019. Additional information Stanley has calculated the payback period for the new machine as 4 years. He has been advised to evaluate his purchase using the net present value (NPV) method. (c) Discuss how the NPV method might give Stanley a more accurate evaluation compared to the payback method

Answer & Explanation Solved by verified expert

See Answer