Question

Problem 8-28 Cash Budget with Supporting Schedules (L08-2, L08-4, LO8-7, LO8-8) Westex Products is a wholesale distributor of Industrial cleaning products. When the treasurer of Westex Products approached the company's bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made. Because the treasurer is unsure as to the particular quarters in which bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget: a. Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are: Merchandise Purchases Sales $ 200,000 $126,000 Current Yeart Tourth quarter actual Next year. First quarter estimated Second quarter estimated Third quarter estimated Fourth quarter estimated $ 300,000 $ 400,000 $ 500.000 $ 200,000 $186,000 $246,000 $ 305,000 $126,000 b. All sales are on account. The company normally collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year's fourth- quarter actual data. C. Eighty percent of a quarter's merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter d. Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount $20,000 each quarter is depreciation, e. The company will pay $10,000 in dividends each quarter. Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash. 9. The Cash account contained $10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained. h. The company's bank allows borrowing in increments of $1,000 at the beginning of each quartet up to a total loan balance of $100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year. L At present, the company has no loans outstanding. Required: 1. Calculate the expected cash collections by quarter and in total for next year. 2. Calculate the expected cash disbursements for merchandise purchases by quarter and in total for next year. 3. Calculate the expected cash disbursements for selling and administrative expenses, by quarter and in total for next year 4. Prepare a cash budget by quarter and in total for next year.

Answer 1

First Second Third Fourth Total $2,61,000 $3,59,000 $4,57,000$2,95,000 $13,72,000 2 Total Cash Disbursements $1,74,000 $2,34,000 $2,93,200 $1,61,800 $8,63,000 1 Total Cash Collections

Workings: Cash collections for First Quarter = Fourth Quarter Sales x 33% First Quarter Sales x 65% = 200,000 x 33% 300,000 x 65% 2,61,000 = First Quarter Sales x 33 % +Second Quarter x 65% Cash collections for Second Quarter = 300,000 x 33% +400,000 x 65% = S 3,59,000 Cash collections for Third Quarter = Second Quarter Sales x 33% +Third Quarter x 65% = 400,000 x 33% +500,000 x 65% = $ 4,57,000 Third Quarter Sales x 33% Fourth Quarter x 65% Cash collections for Fourth Quarter = 500,000 x 33% + 200,000 x 65% 2,95,000

= Fourth Quarter Merchnadise Purchases x 20% +First Quarter Merchandise Purchases x 80% Cash Disbursements for First Quarter - 126,000 x 20% 186,000 x 80% = S 1,74,000 = First Quarter Merchnadise Purchases x 20% Second Quarter Merchandise Purchases x 80% Cash Disbursements for Second Quarter - 186,000 x 20% 246,000 x 80% = S 2,34,000 Cash Disbursements for Third Quarter = Second Quarter Merchnadise Purchases x 20% +Third Quarter Merchandise Purchases x 80% = 246,000 x 20% 305,000 x 80% 2,93,200 = Third Quarter Merchnadise Purchases x 20% Fourth Quarter Merchandise Purchases x 80% Cash Disbursements for Fourth Quarter 305,000 x 20% +126,000 x 80% 1,61,800

First Third Fourth Second Year 3 Budgeted Cash Disbursements for Selling and Administrative Expenses $ 75,000 $90,000 $1,05,000 $ 60,000 $3,30,000

Workings: = Fixed Amount + First Quarter Sales x 15% - Depreciation Budegeted for First Quarter = 50,000300,000 x 15% - 20,000 = $ 75,000 Budegeted for Second Quarter = Fixed Amount + Second Quarter Sales x 15% - Depreciation = 50,000+400,000 x 15% - 20,000 = $90,000 = Fixed Amount+Third Quarter Sales x 15% Depreciation Budegeted for Third Quarter 50,000 500,000 x 15% - 20,000 = $1,05,000 = Fixed Amount + Fourth Quarter Sales x 15% Depreciation Budegeted for Fourth Quarter = 50,000200,000 x 15% - 20,000 = $ 60,000

4 Westex Products Cash Budget Quarter First Second Third Fourth Year Beginning Cash Balance (A) Add Collections From Customers (B) Total Cash Available (C = A+B) Less Disbursements: $ 10,000 $ 12,000 $10,000 $ 10,800 $ $2,61,000 $3,59,000 $4,57,000 $2,95,000 $13,72,000 $2,71,000 $3,71,000 $4,67,000 $3,05,800 $13,82,000 10,000 $1,74,000 $2,34,000 $2,93,200 $1,61,800 $ 8,63,000 $ 75,000 90,000 $1,05,000 $60,000 $3,30,000 $ 10,000 10,000 $10,000 10,000 $ $ 75,000 $ 48,000 $ $2,59,000 $4,09,000 $4,56,200$2,31,800 $13,56,000 $ 12,000 $ -38,000 $ 10,800 $ 74,000 $ Merchandise Purchases Selling and Administrative Expenses Dividends 40,000 $ 1,23,000 Land Total Cash Disbursements (D) Excess (Deficiency) of cash available over disbursements (E C-D) Financing: Borrowings Repayments 26,000 48,000 $ 48,000 $-48,000 $ -48,000 $ -2,400 $ $ 50,400 $ $ $ $ -2,400 Interest Total Financing (F) Ending Cash Balance (E+ F) $ 48,000 $ $ 12,000 $ 10,000 $ 10,800 $ 23,600 $ $ -2,400 23,600

Workings: Deficiency of Cash Available + Minimum Cash balance required Borrowings at the End of Second Quarter 38,000 10,000 48,000 Interest on Borrowings Borrowings x rate of interest x 2 quraters = 48,000 x 2.5% x 2 2,400

Answer 2

For interest on borrowing you'd multiply it by 3 quarters instead of 2. Other than that, the previous answer is correct.