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Preparation of a Cash Budget Under Two Alternatives

Preparation of a Cash Budget Under Two Alternatives

Each autumn, as a hobby, Suzanne De Angelo weaves cotton place mats to sell at local
crafts shop. The mats sell for $ 20 per set of four. The shop charges a 10% commission and remits the net proceeds to De Angelo at the end of December. De Angelo has woven
and sold 25 sets each of the last two years. She has enough cotton in inventory to make
another 25 sets. She paid $7 per set for the cotton. De Angelo uses a four -harness loom
that she purchased for cash exactly two years ago. It is depreciated at the rate of $10
per month. The accounts payable relate to the cotton inventory and are payable by
September 30.

De Angelo is considering buying an eight-harness loom so that she can weave more
intricate patterns in linen. The new loom costs $ 1,000; it would be depreciated at $ 20
per month. Her bank has agreed to lend her $ 1,000 at 18% interest, with $200 principle
plus accrued interest payable each December 31. De Angelo believes she can weave
15 linen place mat set in time for the Christmas rush if she does not weave any cotton
mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. De Angelo's supplier will sell her linen on credit, payable December 31.

De Angelo plans to keep he old loom whether or not she buys the new loom. The
balance sheet for her weaving business at August 31 is as follows:

Suzane De Angelo, Weaver
Balance Sheet
for the period ending, August 31, 20XX

Current assets: Current liabilities
Cash $25 Account payable $74
Inventory of cotton 175

Fixed assets: Owner equity 386
Loom 500
Accumulated depreciation (240)

Total assets $460 $460

1. Prepare a combined cash budget for the four months ending December 31, for two alternatives: weaving the place mats in cotton using the existing loom and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, and a budgeted balance sheet at December 31.

2. On the basis of financial considerations only, what should De Angelo do? Give your reason.

3. Give What nonfinancial factors might De Angelo consider in her decision?


Solution Summary

For your review, I have attached a fully formatted MS Excel spreadsheet involving the financial and decision analysis of cash budgets for two business alternatives.