Question

Cash Budget

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	$106,000		$134,000		$170,000
Manufacturing costs	45,000		58,000		61,000
Selling and administrative expenses	31,000		36,000		37,000
Capital expenditures	_		_		41,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 65% 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 $6,000 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 $40,000, marketable securities of $57,000, and accounts receivable of $122,750 ($93,000 from April sales and $29,750 from March sales). Sales on account for March and April were $85,000 and $93,000, respectively. Current liabilities as of May 1 include $13,000 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 $6,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $31,000.

The controle of Sonoma Howare Inc. Instruct you to prepare a mon cash budget for the next three months. You are presented with the following budget information $100,000 .00 $170.000 Manufacturing con Selling and administrative expenses 31,000 The company expect to all about 10 of merchandise for cash of sales on account, 65% 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 present 96,000 of the estimated monthly manufacturing costs. The ce premi e t hea r ty are paid in November of the remainder of the manufacturing costs, are expected to be paid in the month in which the incurred and the balance in the following month Current set as of May 1 Indude cachof $40,000, mart respective Current Bless of Parlindude 13.000 f $16,000 will be made in So r ter u res of $57.000 and accounts rec 1 122,700 .000 unt parte incurred in April for manufacturing costs. Als d end of $5,000 is expected to be dedared i n and add e 29.5 from March Sales Sales on account for Harch and April 15.000 and $99.000 p repaid in in the perioder med. An estimated income taxamento to main ch balance of 531,000. 1. Prepare a monthly cash budget and supporting schedules for May June, and cash dec a nd defidency which should be indicated with a mission m wares Escach puso Sing and more

Answer 1

Answer -

1. Answer -

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sale	$10600	$13400	$17000
Collection of accounts receivable	$90200	$94560	$111780
Total cash receipts	$100800	$107960	$128780
Estimated cash payments for:
Manufacturing costs	$46150	$50050	$54550
Selling and administrative expenses	$31000	$36000	$37000
Capital expenditures			$41000
Other purposes:
Income tax		$16000
Dividends			$6000
Total cash payments	$77150	$102050	$138550
Cash increase or (decrease)	$23650	$5910	-$9770
Cash balance at beginning of month	$40000	$63650	$69560
Cash balance at end of month	$63650	$69560	$59790
Minimum cash balance	$31000	$31000	$31000
Excess or (deficiency)	$32650	$38560	$28790

2. Answer -

The budget indicates that the minimum cash balance will be maintained in July. At the end of May and June, the cash balance will exceed the minimum desired balance.

Supporting calculation:

a. Collections of accounts receivable:

	Sales on account	Percentage	May	June	July
March sales:
Collection in May	$85000	35%	$29750
April sales:
Collection in May	$93000	65%	$60450
Collection in June	$93000	35%		$32550
May sales:
Collection in June	$95400	65%		$62010
Collection in July	$95400	35%			$33390
June sales:
Collection in July	$120600	65%			$78390
Total			$90200	$94560	$111780

Here,

Sales on account :

For May = Total sales - Cash sales = $106000 - $10600 = $95400

For June = Total sales - Cash sales = $134000 - $13400 = $120600

b. Payment of manufacturing costs:

	Costs on account	Percentage	Payments
Paid in May:
Incurred in April			$13000
Incurred in May	$39000	85%	$33150
Total			$46150
Paid in June:
Incurred in May	$39000	15%	$5850
Incurred in June	$52000	85%	$44200
Total			$50050
Paid in July:
Incurred in June	$52000	15%	$7800
Incurred in July	$55000	85%	$46750
Total			$54550

Here,

Costs on account:

For May = Total manufacturing cost - Depreciation, Insurance and Property tax expenses = $45000 - $6000 = $39000

For June = Total manufacturing cost - Depreciation, Insurance and Property tax expenses = $58000 - $6000 = $52000

For July = Total manufacturing cost - Depreciation, Insurance and Property tax expenses = $61000 - $6000 = $55000