Question

Cash Budget

The controller of Bridgeport Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	September		October		November
Sales	$130,000		$161,000		$211,000
Manufacturing costs	55,000		69,000		76,000
Selling and administrative expenses	46,000		48,000		80,000
Capital expenditures	_		_		51,000

The company expects to sell about 10% 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 $7,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in January, and the annual property taxes are paid in December. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month.

Current assets as of September 1 include cash of $49,000, marketable securities of $70,000, and accounts receivable of $145,200 ($114,000 from July sales and $31,200 from August sales). Sales on account for July and August were $104,000 and $114,000, respectively. Current liabilities as of September 1 include $7,000 of accounts payable incurred in August for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $19,000 will be made in October. Bridgeport’s regular quarterly dividend of $7,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $48,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for September, October, and November. Assume 360 days per year for interest calculations.

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated cash receipts from:
	$	$	$
Total cash receipts	$	$	$
Less estimated cash payments for:
	$	$	$
Other purposes:
Total cash payments	$	$	$
	$	$
Cash balance at end of month	$	$	$
Excess or (deficiency)	$	$	$

2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

The budget indicates that the minimum cash balance   be maintained in November. This situation can be corrected by   and/or by the   of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will   the minimum desired balance.

Answer 1

CASH BUDGET

	SEPTEMBER	OCTOBER	NOVEMBER
CASH SALES	$13,000	$16,100	$21,100
CREDIT SALES COLLECTION	$111,000	$116,100	$136,530
TOTAL CASH RECIEPTS	$124,000	$132,200	$157,630
LESS PAYMENTS
MANUFACTURING COST	-$45,400	-$59,200	-$67,600
SELLING AND ADMINISTRATIVE EXPENSE	-46,000	-48,000	-80,000
CAPITAL EXPENDITURE	0	0	-55,000
OTHER
INCOME TAX	0	-19000
DIVIDENDS	0	0	-7,000
TOTAL CASH PAYMENTS	-$91,400	-$126,200	-$209,600
CASH INCREASE / -CASH DECREASE	$32,600 (124,000-91,400)	$6,000 (132,200-126,200)	-$51,970 (157630-209600)
PLUS CASH AT BEGINNING	$49,000	$81,600	$87,600
CASH AT END	$81,600	$87,600	$35,630
MINIMUM CASH BALANCE	$48,000	$48,000	$48,000
EXCESS/-DEFICIENCY	$33,600	$39,600	-$12,370

SALES COLLECTION

	SEPTEMBER	OCT	NOV
SALES	130,000	161,000	211,000
CASH SALES 10% OF SALE	13,000	16,100	21,100
ON ACCOUNT SALES	117,000	144,900	189,900
70% OF ABOVE SALES IN NEXT MONTH	79,800 (70% OF AUGUST SALES 114000)	81,900 (117,000*70%)	101,430 (144900*70%)
30% OF ABOVE SALES IN MONTH FOLLOWING NEXT MONTH	31,200 OF JULY SALES	34,200 (30% OF 114000 AUGUST SALES)	35,100 (117,000*30%)
TOTAL ON ACCOUNT COLLECTION	$111,000	$116,100	$136,530

MANUFACTURING COST

	SEP	OCT	NOV
TOTAL	55,000	69,000	76,000
DEPRECIATION INSURANCE AND TAXES NOT PAID IN CASH	7000	7000	7000
NET MANUFACTURING COST	48,000	62,000	69,000
80% IN SAME MONTH	$38,400	$49,600	55,200
20% IN FOLLOWING MONTH	$7000 OF AUGUST	$9,600 (48000*20%)	12,400 (62,000*20%)
TOTAL PAID	$45,400	59,200	$67,600

2] The budget indicates that the minimum cash balance will not be maintained in November. This situation can be corrected by   and/or by the SELLING of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will EXCEED the minimum desired balance.