In-tech Corporation’s sales and purchases for the last threemonths are as follow
ID: 2780254 • Letter: I
Question
In-tech Corporation’s sales and purchases for the last threemonths are as following:
Sales ($) Purchases ($)
October 100,000 80,000
November 90,000 100,000
December 120,000 75,000
For the next three months, it estimates sales and purchasesto be as following:
Sales ($) Purchases ($)
January 90,000 70,000
February 80,000 70,000
March 80,000 70,000
It pays 40 percent of purchases in cash and gets a 4 percent discount. Another 40 percent of purchases are paid the next month, and the final 20 percent of purchases are paid in the second month after the purchase (for example, 40 percent of October purchases are paid in October, 40percent October purchases are paid in November, and 20percent October purchases are paid in December). Half of the sales are made in cash, and the balance is collected the next month. Cash sales are given a two percentdiscount, and five percent of credit sales end up as baddebt. The monthly operating expenses for In-tech Corporation’s are $10,000. In-tech expects to sell one ofits machinery in March for $25,000. It will buy thereplacement in April for $50,000. The cash balance as on December 31 was $50,000. In-tech has a target cash balanceof $50,000.
Prepare a monthly cash budget for the next three months.
Explanation / Answer
Just go month by month and transaction by transaction. For purchases, we need to keep in mind the purchases made in November and December as well as 20% of November purchases will be paid in January, 40% of December purchases will be made in Janauary and 20% of December purchases will be paid in February. For sales, we need to take care of half December sales that are to be received in January. Initial purchases of 40% made in cash will be made @96% due to 4% discount. Cash sales will @98% and credit sales will be @95%.
Cash Budget Particulars January February March Opening Balance $50,000 $64,220 $66,290 Less: Purchases - paid now (40 %) $70,000 x 40% x 96% = $26,880 $70,000 x 40% x 96% = $26,880 $70,000 x 40% x 96% = $26,880 - paid next month (40%) $75,000 x 40% = $30,000 (December purchases paid) $70,000 x 40% = $28,000 (January purchases paid) $70,000 x 40% = $28,000 (February purchases paid) - paid next to next month (20%) $100,000 x 20% = $20,000 (November purchases paid) $75,000 x 20% = $15,000(December purchases paid) $70,000 x 20% = $14,000 (January purchases paid) Add: Sales - Collected Now (50%) $90,000 x 50% x 98% = $44,100 $80,000 x 50% x 98% = $39,200 $80,000 x 50% x 98% = $39,200 - Collected next month (50%) $120,000 x 50% x 95% = $57,000 (December credit sales) $90,000 x 50% x 95% = $42,750 (January credit sales) $80,000 x 50% x 95% = $38,000 (February credit Sales) Less: Monthly Operating Expenses $10,000 $10,000 $10,000 Add: Sale of Machinery - - $25,000 Closing Cash Balance $64,220 $66,290 $89,610 Target Cash Balance $50,000 $50,000 $50,000 Excess Cash Available $14,220 $16,290 $39,610