Question

Suppose a company has an Info Processing Division that provides database management services
for the professional photographers who buy its frames. The division uses state-of-the-art
equipment and employs five information specialists. Each specialist works an average of 160
hours a month. The division's controller has compiled the following information:
	Actual Data for Year			Forecasted Data for Year
	November	December		January	February	March
Client billings (sales)	$ 25,000	$ 35,000		$25,000	$20,000	$40,000
Selling & administrative expenses	$ 12,000	$ 13,000		$12,000	$11,000	$12,500
Operating supplies	$ 2,500	$ 3,500		$ 2,500	$ 2,500	$ 4,000
Processing overhead	$ 3,200	$ 3,500		$ 3,000	$ 2,500	$ 3,500
Of the client billings, 60 percent are collected during the month of sale, 30 percent are collected
in the first month following the sale, and 10 percent are collected in the second month following
the sale. Operating supplies are paid for in the month of purchase. Selling and administrative
expenses and processing overhead are paid in the month following the cost's incurrence.
The division has a bank loan of $12,000 at a 12 percent annual interest rate. Interest is paid
monthly, and $2,000 of the loan principal is due on February 28th of next year. Income taxes
of $4,550 for this calender year are due and payable on March 15 of next year. The information
specialists earn $8.50 an hour, and all payroll-related employee benefit costs are included in
processing overhead. The division anticipates no capital expenditures for the first quarter of the
coming year. It expects its cash balances on December 31 of this year to be $13,840.
Required
Prepare a monthly cash budget for the Info Processing Division for the three-month period
ending March 31 of next year. Include each month of the quarter and a quarter total column.
Comment on whether the ending cash balances are adequate for the division's needs.

Answer 1

Monthly cash budget for the info processing Division for the three-month period ending March 31
	January	February	March	Quarter
Cash Collections
60% in the month of sale	$15,000	$12,000	$24,000
30% in the first month following sale
- December billing	$10,500
- January Billing		$7,500
- February Billing			$6,000
10% in the second month following sale
- November billing	$2,500
- December billing		$3,500
- January Billing			$2,500
Total Cash collections	$28,000	$23,000	$32,500	$83,500
Cash Payments
Payment to Information specialist	$6,800	$6,800	$6,800	$20,400
Operating supplies	$2,500	$2,500	$4,000	$9,000
Selling and admin expenses	$13,000	$12,000	$11,000	$36,000
Processing Overhead	$3,500	$3,000	$2,500	$9,000
Loan principal		$2,000		$2,000
Interest on Loan	$120	$120	$100	$340
Income Tax			$4,550	$4,550
Total Cash Payments	$25,920	$26,420	$28,950	$81,290
Cash Surplus / (deficit)	$2,080	-$3,420	$3,550	$2,210
Add: Beginning cash balance	$13,840	$15,920	$12,500	$13,840
Ending cash balance	$15,920	$12,500	$16,050	$16,050
From above cash budget , it seems that the ending cash balances are adequate for the division’s needs as
division has positive adequate cash balance at the end of each month of Quarter.