Question

Case 3

Part 1 - Cash Budget

1. Discuss the purpose of the cash budget.
2. If the cash for the first quarter of the fiscal year indicates excess cash at the end of each of the first two months, how might the excess cash be used?
3. Give an example of how the capital expenditures budget affects other operating budgets.

The controller of the Box Company instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information.

Current assets as of May 1 include cash of $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales).

                                                                        May                 June              July

Sales                                                               100000            90000              80000

Manufacturing Costs                                       40000            60000              50000

Selling and Admin Expenses                          15000            30000              20000

Capital Expenditures                                                                                      50000

The company expects to sell about 10% of its merchandise for cash. Of the remaining 90% sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale).

Of the manufacturing costs, 80% are expected to be paid in the month in which they are incurredand the balance in the following month. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs which will be collected in May.

All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $14,000 will be made in June. Sonoma's regular qtrly dividend of $5,000 is expected to be declared in June and paid in July.

Instructions

1. Prepare a monthly cash budget and supporting schedules for May, June, and July 2016.
2. Management desires to maintain a minimum cash balance of $30,000.  On the basis of the cash budget prepared in part (1), will they meet their goal  ? What recommendation could be made to the controller to increase cash?

Answer 1

Budget of cash expenses for operating expenses	May	June	July
Opening balance	$      33,000	$      58,400	$      52,000
Add: Receipts
Cash sales (10%)	$      10,000	$        9,000	$        8,000
Credit sales (previous month)	$      50,400	$      63,000	$      56,700
Credit sales (month before previous month)	$      18,000	$      21,600	$      27,000
Total balance (opening + receipts)	$    111,400	$    152,000	$    143,700
Less: Payments
Manufacturing costs (80%)	$      32,000	$      48,000	$      40,000
Manufacturing costs (20%)	$        6,000	$        8,000	$      12,000
Selling and admin expenses	$      15,000	$      30,000	$      20,000
Capital expenditures			$      50,000
Income tax		$      14,000
Dividends			$        5,000
Total payments	$      53,000	$    100,000	$    127,000
Closing balance	$      58,400	$      52,000	$      16,700

Management desires to maintain a minimum cash balance of $30,000.  On the basis of the cash budget prepared in part (1), they will not meet their goal in the month of July. The recommendation could be made to the controller to increase the cash that a loan can be taken or capital expenditure can be deferred.

In case of any doubt, please comment.