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MEMORANDUM

To:Zen’s Management

From:Chief Financial Officer

Key Aspects of 2009 Fourth Quarter Operating Budget

Thecompany is not operating effectively and efficiently as it is notmaintaining the recommended cash balance of $ 4,000 at the end ofevery month. Concerning the material purchases budget, themanagement did not utilize the materials for 2009 fourth quarterefficiently, and they are likely to purchase more in the coming yearas shown in the inventory purchases budget. Using the cash budget,the company paid more expenses than the cash it made in thatparticular month. This implies that it did not realize maximumbenefit from its operations. From the cash collections budget, theymore cash from December more than the other months since in thatparticular month they made more sales. They also disbursed more cashfor purchases and operating expenses at the end of that month thatwas paid at the beginning of January. Considering the pro formaincome statement, Zen management made a profit of $ 24,860. This isa good sign though the company did not maintain a steady flow ofcash. This implies that the company is not financially flexible. Iwould advise the management of Zen to consider these operatingbudgets and pro forma income statements and try to improve on them. They should make sure that they maintain a steady flow of cash in thecoming months so that they may not borrow from banks more than whatthey have saved (Sinclair, 2004).

Inventorypurchases budget

Details

3rd quarter of 2009

1st quarter of 2010

Production

67,500

41,250

Add: ending inventory

8,250

54,000

Materials required

75,750

95,250

Less: opening stock

54,000

8,250

Direct materials to be purchased

21,750

87,000

Overallcash budget

Details

September 2009

October 2009

November 2009

December 2009

January 2010

Bal b/f

8,000

-46,925

-137,710

-193,277

-210,342

Add: Receipts

Sales: cash

29,700

35,640

42,768

53,460

28,512

credit

0

20,000

24,000

28,800

36,000

Total receipts

37,700

8,715

-70,942

-111,017

-145,830

Less: Payments

Purchases

73,125

133,125

106,875

80,625

54,375

administration

2,500

2,500

2,500

2,500

2,500

general

3,000

3,600

4,320

5,400

2,880

commission

6,000

7,200

8,640

10,800

5,760

Total payments

84,625

146,425

122,335

99,325

65,515

Bal c/d

-46,925

-137,710

-193,277

-210,342

-211,345

Cashcollections

Details

September

October

November

December

January

Accounts receivable: cash

29,700

35,640

42,768

53,460

28,512

credit

0

20,000

24,000

28,800

36,000

Total cash collected

29,700

55,640

66,768

82,260

64,512

Cashdisbursements for purchases

Details

September

January

Purchases: cash

10,875

43,500

credit

0

10,875

Total ash disbursements

10,875

54,375

Cashdisbursements for operating expenses

Details

September

October

November

December

January

Administration

2,500

2,500

2,500

2,500

2,500

General

3,000

3,600

4,320

5,400

2,880

Commission

6,000

7,200

8,640

10,800

5,760

Total cash disbursements

11,500

13,300

15,460

18,700

11,140

Proforma income statement

Details

$

$

Sales

90,000

Opening stock

54,000

Purchases

21,750

Goods available for sale

75,750

Closing stock

8,250

Cost of sales

67,500

Gross profit

22,500

Add: incomes

Retained earnings

12,250

Total incomes

34,750

Less: Operating expenses

Discount paid(1%*60%*90,000)

540

Administration expense

2,500

General (6%*90,000)

5,400

Depreciation on building and equipment

850

Depreciation on scanning devices

600

Total operating expenses

9,890

Net income

24,860

Proforma balance sheet

Details

$

$

Fixed assets

Buildings and equipment

120,000

Scanning devices

(1,500-600)=900

Total fixed assets

120,900

Current assets

cash

8,000

Accounts receivable

20,000

Closing inventory

4,210

Total current assets

32,210

Total assets

153,110

Current liabilities

Accounts payable

21,750

Total accounts payable

21,750

Financed by

Common stock

150,000

Net profit

24,860

Total equity

174,860

Net equity

153,110

References

Sinclair,P. (2004). Budgeting. New York: Ronald Press Co. [Accessed 5thDec. 2015].

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Problem1

Anincrease in the money supply where prices are constant will decreasethe interest rates, depreciating the interest rates of the country.This will make Canadian output cheaper about the US. Cheaper goodsand services in Canadian market imply that there will be an increasein US demand for the Canadian goods and services increasing domesticoutput. This can be shown by a shift from E1 to E2.

Expansionarygovernment policies that are an increase in the spending by thegovernment will increase the output of Canada, which will in turnincrease the demand for real monetary assets. An increase in thedemand for real monetary assets increases the interest ratesappreciating the currency of Canada about that of the US. This causesa change in the supply curve from DD to DD1 as shown below.a

Problem2

A.

Anincrease in money supply does not change the prices in the short run. This will lead to an increase in money in circulation, and thecitizens of a given country will expect higher inflation in the end. Here, the interest rates decrease leaving to the depreciation of thecurrency. In the long run without PPP, an increase in the moneysupply will increase the price levels. Here, there will be noinflation but the economy will transit into long run equilibriumexpectations of an increase in prices causes a depreciation of thecurrency.

Shortrun

Here,the demand for US products about Canada increases as real exchangerate depreciates. In the long run, the American products are cheaperas compared to the Canadian products.

B.

Exchangerate overshooting indicates excessive fluctuation of the nominal ratein response to the money supply. An increase in the nominal exchangerate directly raises the domestic price levels.

Problem3

Fiscalpolicy is where the government influences an economy through taxationand its spending levels. Where Canadian’s economy is in recession,the government has an aim of maintaining steady prices, having ahigher employment level and the growth of the economy. The Canadiangovernment can reduce the tax levels increasing the level of incomeof companies. This will in turn make companies employ more personnelsince they can now afford to pay them. The increase in employmentlevels implies that the prices of goods and service have reducedmaking them affordable to the citizens of Canada. A government canalso increase its spending levels, which will increase the moneysupply in the economy. An increase in money supply causes a leftwardshift in the aggregate demand curve. This will occur when theCanadian government has reached full employment. To reduce the gapbetween aggregate demand and aggregate supply, the government ofCanada increases their spending levels, which will increase theaggregate demand curve.

Ifthe Canadian government taxes imports, the goods and services of aforeign country about that of Canada will become expensive. To avoidthis, the government of Canada introduces fiscal policies andcontrols. Here, the government cuts down taxes, which will in turnmake imports cheaper about exports increasing the aggregate demandfor imports. This implies that the Canadian currency will buy moregoods and services about another foreign currency. Lower inflationrates can also cause expansionary fiscal policy. When the exchangerate of Canada about other foreign currencies strengthens, theimports of Canada become cheaper. This means that Canada will spendless money on goods and services from a foreign country. This willmake other foreign countries lower their prices so that they can beable to compete with Canada increasing the standards of living of thecitizens of Canada. Fiscal policy also affects the balance ofpayments. Higher exchange rates will make Canada import more ratherthan they export causing a contractionary effect on the economy. This implies that since the currency of Canada is strong theirexports will be considered expensive about other foreign countriesmaking them buy fewer goods and services from Canada. In the longrun, this will lower the gross domestic product of Canada makingCanada more difficult to compete with other countries lowering therevenue hey receive from trade. The government of Canada can alsoincrease its spending levels. When the Canadian government increasesits spending levels, prices of goods in Canada become cheaper aboutother countries increasing the standards of living of its citizens. Other countries will reduce the prices of their goods and services tocounteract with that of Canada that will turn making imports cheaper. Lastly, the Canadian government can control its prices level toalter the levels of imports and exports. When a country increasesits prices, exports will be expensive but when it lowers, its pricesother countries will want to lower their prices making importscheaper.

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