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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 is a non-cash expense, meaning it does not involve an actual cash outflow during the period it is recorded. Similarly, bad debts represent anticipated losses from credit sales that are unlikely to be collected, which also does not impact cash flows directly. Therefore, these items are excluded from the Cash Budget, which only focuses on actual cash receipts and payments.
Step 2
6.1.2 A cash budget is different from a Projected Income Statement.
Answer
A cash budget emphasizes the actual cash inflows and outflows over a specific period, focusing on cash management to ensure that the business can meet its financial obligations. In contrast, a Projected Income Statement reflects revenues and expenses, including non-cash items like depreciation, allowing for projections of profitability. The main difference lies in the fact that the Cash Budget is concerned solely with cash transactions, while the Income Statement also includes accrued revenues and expenses.
Step 3
6.2.1 Complete the Debtors Collection Schedule.
Answer
To complete the schedule, calculate the cash collected from credit sales based on the percentages provided. For instance, in November, for credit sales from October, 50% of R186,000 is collected in the month of sale, and 30% is collected in the month following. The calculations should be done accordingly for all months listed.
Step 4
6.2.2 Calculate the missing amounts denoted by (i) to (v) on the Cash Budget.
Answer
For each of the missing amounts, use the provided sales data and collection patterns:
(i) Cash sales for December = 210,000 * 40% = 140,000.
(ii) Rent income amount for November = 19,710 * 100% / 108% = 18,250.
(iii) Payments to creditors for November = 186,000 * 100% / 310,000 * 125% = 198,400.
(iv) Salaries and wages for December = 80% of fixed salary cost + 36,600 (for leave).
(v) Loan instalment (including interest) for December = 13,625 - 1,625 + 150,000 * 0.13 * (1/12) + 12,000 = 13,495.
Step 5
6.2.3 Comment on the internal controls regarding the collection from debtors and the payment to creditors.
Answer
Two valid points regarding internal controls include:
- The collection process relies on a clear understanding of credit terms, establishing clear expectations for payment timelines and potential discounts for early payments, thus incentivizing timely collections.
- The stark difference where 50% of the debtors pay promptly suggests some reliance on firm credit policies, while the 2% bad debt write-off indicates the need for ongoing review of credit risk management strategies. This emphasizes the importance of monitoring debtor behavior to optimize cash flow.