Question

Use the following information to prepare a cash budget for December.

1. The cash balance on December 1 is $53,400.

2. Actual sales for October and November and expected sales for December are as follows:

	October		November		December
Cash sales	$	77,000	$	81,200	$	87,800
Sales on account	$	435,000	$	538,000	$	644,000

Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

3. Purchases of inventory will total $341,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $165,000, all of which will be paid in December.

4. Selling and administrative expenses are budgeted at $516,000 for December. Of this amount, $94,900 is for depreciation.

5. A new web server for the Marketing Department costing $121,500 will be purchased for cash during December, and dividends totaling $13,000 will be paid during the month.

6. The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed.

Required:

Calculate the expected cash collections for December.

Calculate the expected cash disbursements for merchandise purchases for December.

Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

Expected cash collections	December
Cash sales of December	$87,800
From credit sales:
October sales ($435,000*18/100)	$78,300
November sales ($538,000*60/100)	$322,800
December sales ($644,000*20/100)	$128,800
Total Cash Collections	$617,700
Expected cash disbursements for material purchases	December
Accounts payable - November	$165,000
December purchases ($341,000*30/100)	$105,300
Total cash disbursements for material purchases	$270,300
Cash Budget	December
Beginning cash balance	$53,400
Add: Expected cash collections	$617,700
Total Cash Available (a)	$671,100
Less: Cash Disbursements:
For material purchases	$270,300
For selling and administrative expenses ($516,000 - $94,900)	$421,100
For Purchase of Web Server	$121,500
For Dividends	$13,000
Total Cash Disbursements (b)	$825,900
Preliminary Cash balance (a - b)	($154,800)
Financing:
Borrowings ($154,800 + $20,000)	$174,800
Repayments	$0
Interest Expense	$0
Ending Cash Balance	$20,000