Cash Budget The controller of Dash Shoes Inc. instructs you to prepare a monthly

Question

Cash Budget The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: March April May Sales $94,000 $116,000 $150,000 Manufacturing costs 39,000 50,000 54,000 Selling and administrative expenses 27.000 31.000 33.000 Capital expenditures | 36,000 The company expects to sell about 10% of its merchandise for cash. Of sales on account, 65% 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 s8,000 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, 75% 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 $36,000, marketable securities of $51,000, and accounts receivable of $108,250 ($82.000 from February sales and $26,250 from January sales). Sales on account for January and February were $75,000 and $82,000, respectively. Current liabilities as of March 1 include a $47,000, 12%, 90-day note payable due May 20 and $8,000 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 $2,800 in dividends will be received in March. An estimated income tax payment of $14,000 will be made in April. Dash Shoes' regular quarterly dividend of $8,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $28,000.

Explanation / Answer

Part 1

Dash shoes inc.

cash budget

For the three months ending May 31, 2014

$9400

($94000 * 10%)

$11600

($116000 * 10%)

$15000

($150000 * 10%)

Other purposes :-

$48410

($47000) + (47000 * 12% * 90/360)

Working note 1:-

Calculation of cash received from accounts receivable

$84600

($94000 - $9400)

$54990

$104400

($116000 - $11600)

Working Note 2 : Calculation of manufacturing cost payment

$31000

($39000 - $8000)

$42000

($50000 - $8000)

$46000

($54000 - $8000)

Part 2

1.) The budget indicates that minimum cash balance of $28000 will not be maintained in May.

Reason : minimum balance is not maintained because of high capital expenditure and note maturity

2.) This situation can be corrected by borrowing and/or by the sale of marketable securities if they are held for such purpose.

3.) At the end of March and april, the cash balance will exceed the minimum desired baalance. Such excess can be considered for temporary investments.

Particulars March April May Estimated cash receipts from :- Cash sales

$9400

($94000 * 10%)

$11600

($116000 * 10%)

$15000

($150000 * 10%)

Collection of accounts receivable (Working Note 1) $79550 $83690 $97470 Dividend received $2800 Total cash receipts (A) $91750 $95290 $112470 Estimated cash payments for: Manufacturing costs (Working Note 2) $31250 $39250 $45000 Selling and administrative expenses $27000 $31000 $33000 Capital expenditure $36000

Other purposes :-

Note payable (Assumption 360 days for interest calculatiom)

$48410

($47000) + (47000 * 12% * 90/360)

Income Tax $14000 Dividend $8000 Total cash payments (B) $58250 $84250 $170410 Cash increase/(decrease) [A - B] $33500 $11040 ($57940) Cash balance at the beginning on month $36000 $69500 $80540 Cash balance at the end of month $69500 $80540 $22600 Minimum cash balance requires $28000 $28000 $28000 Excess / (deficit) $41500 $52540 ($5400)

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