Cash Budget The controller of Bridgeport Housewares Inc. instructs you to prepar
ID: 2511514 • Letter: C
Question
Cash Budget The controller of Bridgeport Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: September October November Sales $101,000 $126,000 $169,000 Manufacturing costs 42,000 54,000 61,000 Selling and administrative expenses 35,000 38,000 64,000 Capital expenditures _ _ 41,000 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 $9,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in January, and the annual property taxes are paid in December. 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 September 1 include cash of $38,000, marketable securities of $55,000, and accounts receivable of $112,300 ($88,000 from July sales and $24,300 from August sales). Sales on account for July and August were $81,000 and $88,000, respectively. Current liabilities as of September 1 include $9,000 of accounts payable incurred in August for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $15,000 will be made in October. Bridgeport’s regular quarterly dividend of $9,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $37,000. Required: 1. Prepare a monthly cash budget and supporting schedules for September, October, and November. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. Assume 360 days per year for interest calculations. Bridgeport Housewares Inc. Cash Budget For the Three Months Ending November 30 September October November Estimated cash receipts from: Cash sales $ 10,100 $ 12,600 $ 16,900 Collection of accounts receivable 61,600 Total cash receipts $ $ $ Less estimated cash payments for: $ $ $ Other purposes: Total cash payments $ $ $ $ $ $ Cash balance at end of month $ $ $ Excess or (deficiency) $ $ $ Feedback The primary source of estimated cash receipts is from cash sales and collections on account. To estimate cash receipts from cash sales and collections on account, a schedule of collections from sales is prepared. Learning Objective 5. 2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller? The budget indicates that the minimum cash balance be maintained in November. 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 September and October, the cash balance will the minimum desired balance.
Explanation / Answer
Requirement 1 Bridgeport Houseware Inc. Cash Budget For the Three Months Ending May 31, 2016 September October November Estimated cash receipts from: Cash sales 10100 12600 16900 Collection of accounts receivable 85900 90030 106650 Total cash receipts 96000 102630 123550 Estimated cash payments for: Manufacturing costs 35400 42600 50600 Selling and administrative expenses 35000 38000 64000 Capital expenditures 41000 Other purposes: Income tax 15000 Dividends 9000 Total cash payments 70400 95600 164600 Cash increase or (decrease) 25600 7030 -41050 Cash balance at beginning of month 38000 63600 70630 Cash balance at end of month 63600 70630 29580 Minimum cash balance 37000 37000 41000 Excess or (deficiency) 26600 33630 -11420 Working Note for your understanding Collection from Customers Septemebr October November From July Sales 24300 From August sales 61600 26400 From September sales 63630 27270 From October sales 79380 Total Collection from Credit sales 85900 90030 106650 Requirement 2 The Budget indicates that the minimum cash balance of $29580 maintained in November. This situation can be corrected by borrowing and/or by the sale of marketable securities, if they are held for such purposes. At the end of March and April, the cash balance will exceed the Minimum desired balance.