Question

The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: May June July Sales $107,000 $135,000 $181,000 Manufacturing costs 45,000 58,000 65,000 Selling and administrative expenses 31,000 36,000 40,000 Capital expenditures _ _ 43,000 The company expects to sell about 15% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent $8,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 85% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of May 1 include cash of $41,000, marketable securities of $58,000, and accounts receivable of $119,800 ($94,000 from April sales and $25,800 from March sales). Sales on account for March and April were $86,000 and $94,000, respectively. Current liabilities as of May 1 include $15,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $16,000 will be made in June. Sonoma’s regular quarterly dividend of $8,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $32,000. Required: 1. Prepare a monthly cash budget and supporting schedules for May, June, and July. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. Sonoma Housewares Inc. Cash Budget For the Three Months Ending July 31 May June July Estimated cash receipts from: Cash sales $ $ $ Collection of accounts receivable Total cash receipts $ $ $ Estimated cash payments for: Manufacturing costs $ $ $ Selling and administrative expenses Capital expenditures Other purposes: Income tax Dividends Total cash payments $ $ $ Cash increase or (decrease) $ $ $ Cash balance at beginning of month Cash balance at end of month $ $ $ Minimum cash balance Excess (deficiency) $ $ $ Feedback The primary source of estimated cash receipts is from cash sales and collections on account. To estimate cash receipts from cash sales and collections on account, a schedule of collections from sales is prepared. 2. The budget indicates that the minimum cash balance will not be maintained in July. This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceed the minimum desired balance.

Answer 1

Sonoma Housewares Inc. Cash Budget For the Three Months Ending July 31 July May June Estimated cash receipts from: Cash sales 16,050 20,250 27,150 Collection of accounts receivable 91,600 91,865 107,610 Total cash receipts 112,115 134,760 107,650 Estimated cash payments for: Manufacturing costs 46,450 55,950 48,050 Selling and administrative expenses 31,000 36,000 40,000 Capital expenditures 43,000 Other purposes: Income tax 16,000 Dividends 8,000 Total cash payments Cash increase or (decrease) 100,050 146,950 77,450 12,065 (12,190) 30,200 Cash balance at beginning of month 41,000 71,200 83,265 Cash balance at end of month 83,265 71,200 71,075 Minimum cash balance 32,000 32,000 32,000 Excess (deficiency) 39,200 51,265 39,075

Sonoma Housewares Inc. Schedule of expected cash collections Req 1 Calculation July July May June May June Sales 107,000 135,000 181,000 Cash sales -107,000*15% -135,000*15% -181,000*15% 16,050 20,250 27,150 Collection of accounts receivable Accounts Receivable-Mar sales 25,800 Accounts Receivable-Apr sales 28,200 94,000*70% 65,800 =94,000*30% May sales -107,000*85% 70% -107,000*85%*30% 63,665 27,285 - 135,000*85%*70% June sales 80,325 Total Collection of accounts receivable 91,600 91,865 107,610 Expected cash payments-Mfg costs Req 2 July May July May June June Mfg costs 45,000 58,000 65,000 Less Dep/Insurance/Property tax (8,000) (8,000) (8,000) Total 37,000 50,000 57,000 Cash Payments Accounts Payable-Apr costs 15,000 37,000*85% 31,450 37,000*15% May costs 5,550 June costs 7,500 -50,000*85% -50,000*15% 42,500 July costs Ttoal Cash payments -57,000*85% 48,450 46,450 48,050 55,950