Question

Cash Budget

The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	May		June		July
Sales	$86,000		$90,000		$95,000
Manufacturing costs	34,000		39,000		44,000
Selling and administrative expenses	15,000		16,000		22,000
Capital expenditures	_		_		80,000

The company expects to sell about 10% of its merchandise for cash. Of 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). Depreciation, insurance, and property tax expense represent $3,500 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, 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 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). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs. 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 quarterly dividend of $5,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $30,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July 2016. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments	$	$	$
Cash increase or (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess or (deficiency)	$	$	$

2. The budget indicates that the minimum cash balance   be maintained in July. This situation can be corrected by   and/or by the   of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will   the minimum desired balance.

Answer 1

Collections of accounts receivable June July May 18000 50400 March sales April sales May sales June sales Total cash collection 21600 54180 23220 56700 79920 6840075780 Payments for manufacturing costs: June July April May 6000 24400 May 6100 28400 June July Total cash payments 7100 32400 39500 30400 34500

July 9500 79920 89420 Sonoma Houseware Inc. Cash Budget For the Three Months Ending July 31 May June Estimated cash receipts from: Cash sales 8600 9000 Collections from accounts receivable 68400 75780 Total cash receipts 77000 84780 Estimated cash payments for: Manufacturing costs 30400 34500 Selling and administrative expenses 15000 16000 Capital expenditures Other purposes: Income tax 14000 Dividends Total cash payments 45400 64500 Cash increase (decrease) 31600 20280 Cash balance at beginning of month 33000 64600 Cash balance at end of month 64600 84880 Minimum cash balance 30000 30000 Excess (deficiency) 34600 54880 39500 22000 80000 5000 146500 -57080 84880 27800 30000 -2200 The budget indicates that the minimum cash balance will not be maintained in July. This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will be the minimum desired balance.