Cash Shortages

After trading for 3 years, Ocean Co. Enterprises found that they encountered frequent cash flow problems. In order to keep track of cash andoutflows, they decided to start preparing cash budgets. The following information on actual and projected costs and revenue s is available .

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You are given the following additional information:

  1. Based on past analysis, 20% of sales tend to be for cash while the remainder is normally settled as follows: 60% inthe month following sales and 40% two months after sale.
  2. Dream co. enterprise normally pays 50% of the cost of purchases in the month of purchase and the remainder in the following month.
  3. New equipment will be purchased for $9,000 in January and this will be paid for in equal instalments in January, February and March. Old equipment is expected to be sold for $2,500 in February.
  4. Depreciation of the new equipment will be 10% per annum and will be charged to the accounts monthly.
  5. Salaries will be $3,000 per month and utilities is expected to be $7,000 in January and is expected to increase by I 0% each month after.
  6. Selling expenses of2% of sales will be paid in the month of sale and packing expenses of 3% of purchases will bepaid in the month following the purchase date.
  7. The firm will obtain a loan of $40,000 in March at an interest rate of 15% per annum. Interest will be paid on anequal monthly basis commencing in March.
  8. The balance of cash on January 1, 2002 was $15,000.


  1. Prepare a cash budget for the four-month period to April 30, 2002. (22 marks)
  2. State three (3) steps Dream Co. Could take to alleviate cash shortages. (3 marks)

(Total 25 marks)

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