Question

You have the following information. Prepare and evaluate a cash budget for the months of October, November, and December based on the information shown below.

  Sales       Purchases

August    3,000,000    3,500,000

September       4,500,000       2,000,000

October       1,000,000    500,000

November    1,500,000   750,000

December   2,000,000   1,000,000

The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.

∙     Interest income of $50,000 on marketable securities will be received in December.

∙     The firm pays cash for 40 percent of its purchases.

∙     The firm pays for 60 percent of its purchases the following month.

∙     Salaries and wages amount to 15 percent of the preceding month's sales.

∙     Sales commissions amount to 2 percent of the preceding month's sales.

∙     Lease payments of $100,000 must be made each month.

∙     A principal and interest payment on an outstanding loan is due in December of $150,000.

∙     The firm pays dividends of $50,000 at the end of the quarter.

∙     Fixed assets costing $600,000 will be purchased in December.

∙     Depreciation expense each month of $45,000.

∙     The firm has a beginning cash balance in October of $100,000 and maintains a minimum cash balance of $200,000.

Answer 1

cash budget is prepared to find the excess cash required at the end of month and maintain desired cash balance.

it helps in maintaining liquidity and avoid financial crunch in firm.

cash budget

Month	August	September	October	November	December
sales	3,000,000	4,500,000	1,000,000	1,500,000	2,000,000
cash (60%)	1,800,000[3,000,000*60%]	2,700,000[4,500,000*60%]	600,000[1,000,000*60%]	900,000[1,500,000*60%]	1,200,000[2,000,000*60%]
previous month receipts (40%)		1,200,000 [3,000,000*40%]	1,800,000 [4,500,000*40%]	400,000 [1,000,000*40%]	600,000 [1,500,000*40%]
Interest					$50,000
Total receipts		$3,900,000	$2,400,000 [600000+1800000]	$1,300,000	$1,850,000
Purchase	3,500,000	2,000,000	500,000	750,000	1,000,000
cash 40%	$1,400,000[3,500,000*40%]	$800,000[2,000,000*40%]	$200,000[500,000*40%]	$300,000[750,000*40%]	$400,000[1,000,000*40%]
previous month 60% payment		$2,100,000[3,500,000*60%]	$1,200,000[2,000,000*60%]	$300,000[500,000*60%]	$450,000[750,000*60%]
salaries $ Wages		$450,000[3,000,000*15%]	$675,000[4,500,000*15%]	$150,000[1,000,000*15%]	$225,000[1,500,000*15%]
sales commission		$60,000[3,000,000*2%]	$90,000[4,500,000*2%]	$20,000[1,000,000*2%]	$30,000[1,500,000*2%]
lease payments		$100,000	$100,000	$100,000	$100,000
Principle and interest payment					$150,000
cash dividends					$50,000
Fixed asset purchase					$600,000
Total cash disbursement		$3,510,000 [800000+2100000+450000+60000+100000]	$2,265,000	$870,000	$2,005,000
Nt cash flow		$390,000[3,900,000-3,510,000]	$135,000[2,400,000-2,265,000]	$430,000[1,300,000-870,000]	-$155,000[1850000-2005000]
Add:beginning cash balance			$100,000	$235,000	$665,000
Ending cash balance			$235,000[135000+100000]	$665,000[430,000+235000]	$510,000[-155000+665000]
Less: Minimum cash balance			$200,000	$200,000	$200,000
Required finance
excess cash			$35,000	$465,000 [665000-200000]	$310,000 [510,000-200,000]