Question

Chapter 21 Cash Budget Problem Dexter Morgan sells knives. His private business must maintain $50,000 cash at year- end, so he has a revolving loan agreement with Miami Metro Bank to borrow cash when the preliminary cash balance at the end of the month falls below $50,000, and to repay the loan when the balance exceeds $50,000 to the extent of either (a) the loan balance, or (b) the amount of excess cash, whichever is smaller. Cash interest is due to the bank at 1% of the beginning of the month loan balance, if any. The following information relates to Dexter's business in the month of May: • Sales are 30% cash and 70% credit. Credit sales are collected the month following the sale. April sales were $80,000 and May sales are budgeted at $125,000. • Knife inventory is purchased on credit, and credit purchases are paid 85% in the month of purchase and 15% the month following the purchase. April purchases were $50,000 and budgeted May purchases are $85,000. • Cash at April 30 was $50,000. • Loan Payable at April 30 was $135,000. • Salaries expense of $18,000 will be paid in May. • Sales commissions of 6% of sales will be paid in May. • Other cash expenses in the amount of $1,800 will be paid in May. Prepare the cash budget for Dexter Morgan as of May 31.

Answer 1

Cash Budget - For May:

Dexter Morgan
Cash Budget
For May 31
	May
Beginning cash balance	$50,000
Add: Cash receipts:
Cash sales ($125,000*30/100)	$37,500
April Credit sales ($80,000*70/100)	$56,000
Total cash available	$143,500
Less: Cash payments:
Cash payment of April purchases ($50,000*15/100)	($7,500)
Cash payment of May purchases ($85,000*85/100)	($72,250)
Salaries payment	($18,000)
Sales commission paid ($125,000*6/100)	($7,500)
Other cash payments	($1,800)
Interest payment ($135,000*1/100)	($1,350)
Preliminary cash balance	$35,100
Additional load ($50,000 - $35,100)	$14,900
Ending cash balance	$50,000