Cash Budget The company expects to sell about 10% of its merchandise for cash. O
ID: 2369819 • Letter: C
Question
The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $3,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in July, 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 March 1 include cash of $10,000, marketable securities of $40,000, and accounts receivable of $75,600 ($60,000 from February sales and $15,600 from January sales). Sales on account for January and February were $52,000 and $60,000, respectively. Current liabilities as of March 1 include a $12,000, 15%, 90-day note payable due May 20 and $4,000 of accounts payable incurred in February for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $1,800 in dividends will be received in March. An estimated income tax payment of $16,000 will be made in April. Santa Fe's regular quarterly dividend of $3,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $30,000.
Explanation / Answer
Cash budget preparation requires analyzing the timing of the receipts and payments especially for sales and purchases. It is not possible to do the complete assignment, but I can try and help you to complete it.
1. Collection from Customers:
Prepare a schedule covering period for each month from November to July.
Record sales for each month as given in the question with break up of collection, i.e., 10%, 60% and 30%
Collections during any month will be recorded as:
10% of current month sales
60% of last month sales
30% of the second last month sales
For example in January 2004, the collection will be:
10% January Sales 9,000
60% Dec 2003 sales 132,000
30% Nov 2003 sales 52,500
Total collection 193,500
Similar exercise for payments to suppliers. The question has already mentioned the criteria that the purchases are 60% of the sales value. For January it will be 54,000 and will be purchased in Nov 2003, but paid for in February 2004. As such the payment in January 2004 will be for December sales.
I would suggest the headings for cash budget as:
RECEIPTS
Collection from Customers
Short term loan
Total receipts
DISBURSEMENTS
Payment to suppliers
Rent
Expenses
Taxation
Repayment of short term loan
Interest on loan
Repayment of Notes payable
Total payments
Surplus/(Deficit) Receipts less payments
Opening cash balance
Closing Cash balance