Question

Cash Budget The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: June July August Sales $160,000 $185,000 $200,000 Manufacturing costs 66,000 82,000 105,000 Selling and administrative expenses 40,000 46,000 51,000 Capital expenditures 120,000 The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainder the following month (second month after sale). Depreciation, insurance, and property tax expense represent $12,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in February, and the annual property taxes are paid in November. 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 June 1 include cash of $42,000, marketable securities of $25,000, and accounts receivable of $198,000 ($150,000 from May sales and $48,000 from April sales). Sales on account in April and May were $120,000 and $150,000, respectively. Current liabilities as of June 1 include $13,000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $24,000 will be made in July. Mercury Shoes' regular quarterly dividend of $15,000 is expected to be declared in July and paid in August. Management wants to maintain a minimum cash balance of $40,000. Required: 1. Prepare a monthly cash budget and supporting schedules for June, July, and August. Enter all amounts as positive numbers except for Cash (decrease) and (deficiency). Use the minus sign to indicate an overall cash decrease and deficiency.

Answer 1

Solution 1:

Computation of Collection from Customer
Particulars	June	July	August
Collection for July Sales	$48,000.00
Collection for August Sales	$90,000.00	$60,000.00
Collection for September Sales		$86,400.00	$57,600.00
Collection for October Sales			$99,900.00
Total cash collections	$138,000.00	$146,400.00	$157,500.00

Computation of Cash payment of manufacturing costs
Particulars	June	July	August
Payment for August Manufacturing cost	$13,000.00
Payment for September Manufacturing cost	$43,200.00	$10,800.00
Payment for October Manufacturing cost		$56,000.00	$14,000.00
Payment for November Manufacturing cost			$74,400.00
Total cash disbursements	$56,200.00	$66,800.00	$88,400.00

Mercury Shoes Inc.
Cash Budget
For the Three Months Ending August 31
Particulars	June	July	August
Estimated cash receipts from:
Cash sales	$16,000.00	$18,500.00	$20,000.00
Collection of accounts receivable	$138,000.00	$146,400.00	$157,500.00
Total cash receipts	$154,000.00	$164,900.00	$177,500.00
Less estimated cash payments for:
Manufacturing costs	$56,200.00	$66,800.00	$88,400.00
Selling and administrative expenses	$40,000.00	$46,000.00	$51,000.00
Capital expenditures			$120,000.00
Other purposes:
Income tax		$24,000.00
Dividends			$15,000.00
Total cash payments	$96,200.00	$136,800.00	$274,400.00
Cash increase or (decrease)	$57,800.00	$28,100.00	-$96,900.00
Plus cash balance at beginning of month	$42,000.00	$99,800.00	$127,900.00
Cash balance at end of month	$99,800.00	$127,900.00	$31,000.00
Less minimum cash balance	$40,000.00	$40,000.00	$40,000.00
Excess or (deficiency)	$59,800.00	$87,900.00	-$9,000.00

Solution 2:

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