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6.1 Explain why: 6.1.1 Depreciation and bad debts will not appear in a Cash Budget - NSC Accounting - Question 6 - 2017 - Paper 1
Question 6
6.1 Explain why: 6.1.1 Depreciation and bad debts will not appear in a Cash Budget. 6.1.2 A cash budget is different from a Projected Income Statement. 6.2 KWT DI... show full transcript
Worked Solution & Example Answer:6.1 Explain why: 6.1.1 Depreciation and bad debts will not appear in a Cash Budget - NSC Accounting - Question 6 - 2017 - Paper 1
Step 1
6.1.1 Depreciation and bad debts will not appear in a Cash Budget.
Answer
Depreciation does not appear in a Cash Budget because it is a non-cash expense, meaning it does not involve cash outflows or inflows. Bad debts also do not appear as they represent an estimation of uncollectable accounts, not actual cash transactions. A Cash Budget solely focuses on cash movements, including receipts and payments.
Step 2
6.1.2 A cash budget is different from a Projected Income Statement.
Answer
A Cash Budget is primarily concerned with the cash inflows and outflows during a specific period. It is a forward-looking statement that helps manage liquidity and ensure that cash is available when needed. Conversely, a Projected Income Statement includes both cash and non-cash items, which reflects overall profitability and shows how revenue is transformed into profits over a period, including expenses like depreciation.
Step 3
6.2.1 Complete the Debtors Collection Schedule.
Answer
To complete the Debtors Collection Schedule, we calculate the amounts based on the provided percentages:
- September: 180,000 * 40% = 72,000
- October: 186,000 * 30% = 55,800
- November: 92,225 is directly provided
- December: 210,000 * 50% = 105,000
Thus, the completed schedule looks like this:
| MONTH | CREDIT SALES | NOVEMBER | DECEMBER |
|---|---|---|---|
| September | 180,000 | ? | ? |
| October | 186,000 | 55,800 | ? |
| November | ? | 92,225 | ? |
| December | 210,000 | ? | 105,000 |
| TOTAL | ? | ? |
Step 4
6.2.2 Calculate the missing amounts denoted by (i) to (v) on the Cash Budget.
Answer
For each part, we will calculate:
(i) Cash sales for December:
- Formula: Cash Sales = Credit Sales * 40%
- Calculation: 210,000 * 40/100 = 84,000.
(ii) Rent income amount for November:
- Formula: Rent Income = Total Rent x Increase Percentage
- Calculation: 19,710 * 100/108 = 18,250.
(iii) Payments to Creditors for November:
- Calculation involves total purchases of stock and payments based on given percentages leading to 310,000.
- Thus, Payments to Creditors = 198,400.
(iv) Salaries and wages for November:
- As per the information provided, will remain consistent leading to 109,400.
(v) Loan installment (including interest) for December:
- Total interest calculated from principal and previous installments will result in 13,495.
Step 5
6.2.3 Comment on the internal controls regarding the collection from debtors and the payment to creditors.
Answer
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The company has a clear structure for collecting debts with defined payment terms where 50% of debtors pay within the month of sale. This efficient collection mechanism helps maintain cash flow.
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However, reliance on credit purchases (80% on credit) can increase exposure to liquidity risks. Monitoring payments radially through risk assessment and tighter control might be necessary to mitigate bad debts.