The company expects to sell about 10% of its merchandise for cash. Of sales on a
ID: 2504209 • Letter: T
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.
1. Prepare a monthly cash budget and supporting schedules for march april and may.
2. on the basis of the cash budget, what recommendation should be made to the controller?
Explanation / Answer
Please find below the cash budget:
Supporting explanation:
Manufacturing costs are spread 80% in same month and 20% in next month.
Note payable in May = 12,000 + 12,000 * 15% * 90 / 365 = 12,444
Beginning cashh in any month = ending cash of previous month
The other items are self-explanatory.
Recommendation for controller is to arrange for some financing in May as the cash balance is dipping below the minimum required balance of 30,000. Alternately, the controller can arrange for payment for capital expenditure to be deferred to a later date.
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March April May Beginning cash 10,000 37,200 39,100 Add receipts Collections from customers Cash sales 7,000 8,400 9,200 Previous month credit sales 42,000 44,100 52,920 Previous 2 month credit sales 15,600 18,000 18,900 Total collections from customers 64,600 70,500 81,020 Dividend received 1,800 0 0 Total cash available 76,400 107,700 120,120 Less disbursements Current month manufacturing costs 23,200 28,800 31,600 Previous month manufacturing costs 4,000 5,800 7,200 Selling and administrative costs 12,000 18,000 21,000 Capital expenditures 0 0 20,000 Note payable repayment 0 0 12,444 Income tax payment 16,000 Dividend paid 0 0 3,000 Total disbursements 39,200 68,600 95,244 Cash surplus (deficit) 37,200 39,100 24,876