QUESTION 1:

PART A

You  are  given with  the  following information relating to Rooney PLC. The accountant is currently developing the budget for the next three months ending 30 June 2010.

(a) The credit terms are as given: 10% sales are cash, 50% of the cred it sales are collected next month and the balance in the following month,

(b) For the subsequent items of expenditure, the credit terms are as follows: Materials - 2 months, Wages - 1 month, Overheads - 1 month.

(c) Cash and bank balance on 1st April 2010 is expected to be $6 000

(d) Other relevant information:

(i) Machinery and Plant will be installed in February 2010 at a cost of $96,000. The monthly instalments of $2 000 is payable as from April onwards

(ii) A dividend of 5% on the ordinary share capital of $200 0 00 will be paid on 1st June.

(iii) An advance receipt of $9 000 is expected in June and will relate to the sale of vehicles.

(iv) Dividends from investments amounting to $1 000 are to be received in May.

(v) An advance payment of income tax is to be paid in June of $2 000.

Required:

Create cash budget for three months ending 30 June 2010.

PART B

Since cash is important for the survival of any business, it is often suggested to develope a cash budget, as it is no use budgeting for product ion and for sales if, during the budget period, the business runs out of cash funds.

Required:

Explain four advantages why cash budgets should be prepared?