Question

Laurey Inc. is working on its cash budget for May. The budgeted beginning cash balance is $45,000. Budgeted cash receipts total $129,000 and budgeted cash disbursements total $124,000. The desired ending cash balance is $60,000. To attain its desired ending cash balance for May, the company needs to borrow:

Answer 1

Concepts and reason

Budget: A budget is a financial statement that involves estimation of the receipts and expenditures during a certain period of time. It may include estimation of the quantity to be produced or sold during such period of time.

Types of budget: A budget can be prepared for a variety of purposes. A budget is an important planning tool that ensures that you possess sufficient resources to support such budgeting estimates. Generally, budgets can be of following types:

• Master Budget

• Operating Budget

• Cash Flow Budget

• Financial Budget

• Static Budget

Cash Budget: A cash budget is a budget prepared for expected cash receipts and payments over a period of time. It enlists the expected cash revenues and expenses during a period. It depicts an entity’s cash position in the future.

Fundamentals

Preparing Cash Budget: To prepare cash budget, the sources of cash receipts and the purpose of cash expenditures must be known. Firstly, the balance of cash in the beginning of any period is taken. All the receipts during the year are added to the opening balance of cash. The total obtained is the available cash over a period. Thereafter, the expenses are deducted to obtain the closing figure.

A cash budget is generally prepared month-wise. The balance of cash in hand at the end of one month or period becomes the opening balance of cash in the next month or period.

The beginning cash balance, the budgeted cash receipts and budgeted disbursements are given. In situations when the ending cash balance is given, use the formula as shown below to find the amount to be borrowed:

${\rm{Ending Cash Balance}} = {\rm{Beginning Cash Balance}} + {\rm{Receipts}} - {\rm{Payments}} + {\rm{Borrowings (If any)}}$

Calculate the amount of borrowings as shown below:

$\begin{array}{c}\\{\rm{Amount to be borrowed}} = {\rm{Ending Cash Balance}} - {\rm{Receipts}} + {\rm{Payments}}\\\\{\rm{ }} - {\rm{Beginning Cash Balance}}\\\\ = \$ 60,000 - \$ 129,000 + \$ 124,000 - \$ 45,000\\\\ = \$ 10,000\\\end{array}$

Ans:

The amount to be borrowed is $10,000.