# The Beginning Cash Collections Are Added To The Beginning Cash Balance Accounting Essay

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According to Braun, Tietz and Harrison (2010), the combined cash budget merges the budgeted cash collections and cash payments to project the company's ending cash position. The beginning cash collections are added to the beginning cash balance to find the total cash that is available. The budgeted cash payments are then subtracted to get the ending cash balance before financing and based on this, the company knows whether it needs to borrow money or whether it has to borrow money or it has excess funds to repay or invest.

## Linen

Beginning balance of cash

\$ 25

\$ 25

Cash collections (based on Exhibit 9-14 & 9-5 from the textbook):

Cotton sales [25 Ã- (0.90 Ã- \$20)]

450

Linen sales [15 Ã- (0.90 Ã- \$50)]

675

Total cash available

\$475

\$ 700

De Angelo's cash disbursements:

Accounts payable

\$ 74

\$ 74

Cost of linen (15 Ã- \$18)

270

Purchase of new loom

1,000

Total cash disbursements

74

1,344

Ending cash balance before financing

401

(644)

Financing:

Borrowings

\$1,000

Repayments

(200)

Interest payment (\$1,000 Ã- 0.18 Ã-

4/12)

(60)

Total effect of financing

740

End cash balance

## Step 2a: Budgeted Income Statement for four months ending December 31

According to Braun, Tietz and Harrison (2010), the budgeted income statement helps managers know in advance whether their plans will result in an acceptable level of income. If not, they will have to cut their expenses and increase sales revenues. I used Exhibits 9-5, 9-10 and 9-12 to do this part of the problem.

## Linen

Sales revenue

Cotton sales [25 Ã- (0.90 Ã- \$20)]

\$450

Linen sales [15 Ã- (0.90 Ã- \$50)]

\$675

Less: Cost of goods sold:

Cotton (25 Ã- \$7)

(175)

Linen (15 Ã- \$18)

(270)

Less: Operating Expense:

For old loom (4 Ã- \$10)

(40)

(40)

For new loom (4 Ã- \$20)

(80)

Operating income

235

285

Less: Interest expense (\$1,000 Ã- 0.18 Ã- 4/12)

(60)

Net income

\$235

\$225

## Step2b: Budgeted Balance Sheet

I have done this using Exhibit 9-17 from Braun, Tietz and Harrison (2010) as a reference.

## Assets

Current Assets

Cotton

Linen

Cash (from combined budget)

\$401

\$96

Raw materials Inventory

175

Total Current Assets

401

271

Fixed Assets

Loom

500

1500

Less: Accumulated Depreciation

280[\$240 + \$40 (operating expense in step2a)]

360 [\$240 + \$40 + \$80(operating expense in step2a)]

Total fixed assets

220

1140

Total assets

621

1411

## Liabilities

Accounts Payable

800[1000-200]

Total liabilities

800

Owners Equity

621 [386 + 235(net income from step2a)]

611 [386 + 225(net income from step 2a)]

Total liabilities and owners equity

\$621

\$1,411

## Requirement 2

Based on financial considerations only, I believe that by continuing to weave the place mats in cotton using the existing loom, De Angelo will have \$401 ad the end cash balance (from step 1 in requirement 1). If the new looms are used, the cash balance on December 31 is only \$96.

## (Continued C9-72)

Also, from step 2 in requirement the net income difference is \$235- \$225 = \$10. Hence I suggest that De Angelo can continue to weave the place mats in cotton using the existing loom rather than buying new looms and pay debts.

## Requirement 3

The non-financial matter that De Angelo must consider is: She might think that with the new loom, she may weave more creative & attractive mats rather than with the old cotton.

## Quarter

Units to be produced (from Production Budget)

5,000

4,400

4,800

14,200

* Quantity (chips) of DM needed per unit

* 3

* 3

* 3

* 3

Quantity (chips) needed for production

15,000

13,200

14,400

42,600

Plus: Desired end inventory of DM

+ 2,640

+ 2,880

+2,520[4,200 * 3 * 20% = 2,520]

+ 2,520

Total quantity (chips) needed

17,640

16,080

16,920

45,120

Less: Beginning Inventory of DM

- 3,000

- 2,640

- 2,880

- 3,000

Quantity (chips) to purchase

14,640

13,440

14,040

42,120

* Cost per chip

* \$2.00

* \$2.00

* \$2.00

* \$2.00

Total cost of DM purchases

## Cutting Department

Units to be produced (from Production Budget)

500

700

800

* Direct labor hours per unit

* 1

* 1.5

* 1.2

Total cutting hours required

500

1,050

960

* Direct labor cost per hour

* \$10

* \$10

* \$10

Budgeted DL cost

\$5,000

\$10,500

\$9,600

\$25,100

## Assembly Department

Units to be produced (from Production Budget)

500

700

800

* Direct labor hours per unit

* 2

* 2.4

* 2.3

Total assembly hours required

1,000

1,680

1,840

* Direct labor cost per hour

* \$12

* \$12

* \$12

Budgeted DL cost

\$12,000

\$20,160

\$22,080

\$54,240

## 3. Exercise C9-71, page 541: Suggest performance improvements

DATE: 12/29/10

TO: Jeff Towry, Manager

Cycle World

FROM: Donna Tse

SUBJECT: Cycle World's budgeted income statement.

The driving force of budgeting is our company's long term goals and strategies. The budgeted income statement prepared for the year ending July 31 shows that the company would incur net loss of \$2,025. Hence I believe that the company needs to improve its sales revenue to avoid this operating loss.

I suggest that in order to achieve high / increase sales revenues, we need to first increase our sales price and use proper advertisements to promote our product to customers. The salary and commission expense is \$46,000. We can reduce this operating expense by reducing the number of employees. Miscellaneous expense is also high and needs to be reduced. Also, rent expenses can be reduced by moving to a locality where we would incur less expense.

## Static (Master) Budget

Output Units (pools installed)

82,000 [\$1,640,000 / 20]

0

82,000 [\$1,640,000 / 20]

16000 U

98,000 [1,960,000/20]

Sales Revenue

\$1,640,000

0

\$1,640,000

\$320,000 U

\$1,960,000

Variable expenses:

Cost of goods sold

773,750

46,250F

820,000

160,000 F

980,000

Sales commissions

77,375

12,825F

90,200

17,600F

107,800

Shipping expense

42,850

2,250F

45,100

8,800F

53,900

Fixed expenses:

Salary expense

311,450

10,950U

300,500

0

300,500

Depreciation expense

208,750

5,250F

214,000

0

214,000

Rent expense

128,250

20,000U

108,250

0

108,250

81,100

12,600U

68,500

0

68,500

Total expenses

1,623,525

23,025F

1,646,550

186,400F

1,832,950

Operating income

## Requirement 2:

According to Braun, Tietz and Harrison (2010), managers must know why a variance occurred to pinpoint problems and to identify corrective action. To know why static budget variance occurred, managers separate the static budget variance into two different parts: Sales volume budget and flexible budget variances.

I understand that all favorable variances increase operating income and all unfavorable variances decrease operating income. The sales volume variance is \$133,600 for the operating income. This is higher and is not favorable.

As a member of Reel Time's management team, I would like to investigate both the unfavorable sales volume and all flexible budget variances. The rent and the advertising expenses must also be investigated. Care should be taken that there should be proper advertising for the product which would boost its sales.

## Requirement 3

If consumers are postponing purchase until after the introduction of a new format for recordable DVD Players, then I feel that it is important that Reel Time management use proper advertisement campaign to improve sales. The company might do a good job this way by increasing the demand for the product through proper advertisements.

## 1. C10-78, page 613: Ethical dilemmas relating to standards

The Institute of Management Accountants (IMA) is the professional association of all management accountants. There are many ethical challenges that management accountants face these days. IMA hence developed some principles and standards to help them follow ethical behavior. The companies must maintain professional competence, preserve confidentiality of information, uphold integrity and perform duties with credibility by following certain ethical principles that include honesty, fairness, objectivity & responsibility. The company managers must trust the other parties ethical business practices which acts as a vital component to the company's business decisions.

## Issue One

In this case, Willis wants Landers to provide her with the last three years of Sun Coast's standard and actual costs which I believe is a company's confidential information. According to the IMA standards, it is unethical for Landers to provide this information.

## (Continued C10-78)

Since Willis firm is a new firm, it is important for Landers to make sure that they maintain the client confidentiality. Also, since Willis is ready to provide Landers with benchmarks for the outdoor furniture industry free of charge, I again believe that it is equally important for Landers to consider the fact that the Willis firm is new and if they will be able to provide proper benchmarks.

However, Landers needs permission from his controller to go ahead with this offer.

## Issue Two

In this case, I understand that Landers standard cost decision is very important as they are starting a continuous improvement policy that requires a 10 % reduction in standard costs each year for the next three years.

According to the IMA standards, it is important for Landers to uphold integrity of his company and perform his duties with credibility by following certain ethical principles that include honesty, fairness, objectivity & responsibility. Landers might also discuss about this to his controller to make a wise decision.