Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: The cash balance on December 1 is $53,400. Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 77,000 $ 81,200 $ 87,800 Sales on account $ 435,000 $ 538,000 $ 644,000 Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. Purchases of inventory will total $341,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $165,000, all of which will be paid in December. Selling and administrative expenses are budgeted at $516,000 for December. Of this amount, $94,900 is for depreciation. A new web server for the Marketing Department costing $121,500 will be purchased for cash during December, and dividends totaling $13,000 will be paid during the month. The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed. Required: 1. Calculate the expected cash collections for December. 2. Calculate the expected cash disbursements for merchandise purchases for December. 3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

SOLUTION

1. Schedule of expected cash collections for December

Cash sales for the month of December		87,800
December sales collected in December	($644,000 * 20%)	128,800
November sales collected in December	($538,000 * 60%)	322,800
October sales collected in December	($435,000 * 18%)	78,300
Total		617,700

2. Schedule of expected cash disbursements for merchandise purchases for December

Payment for December purchases	($341,000 * 30%)	102,300
Payment for November purchases		165,000
Total		267,300

3. Cash budget for December

Cash balance as on December 1		53,400
Add: Expected cash collections		617,700
Total cash available (A)		671,100
Less: Disbursements
Payment for purchase of merchandise	267,300
Selling and administrative overheads ($516,000 - $94,900)	421,100
Purchase of new web server	121,500
Payment of dividends	13,000
Total cash disbursements (B)		822,900
Excess/ (Deficiency) of cash available over disbursements (A-B)		(151,800)
Financing:
Borrowings		171,800
Repayments		0
Interest		0
Total financing		171,800
Cash balance, Ending		20,000