Question

10. The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

    	May		June		July
    Sales	$86,000		$90,000		$95,000
    Manufacturing costs	34,000		39,000		44,000
    Selling and administrative expenses	15,000		16,000		22,000
    Capital expenditures	_		_		80,000

    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 $3,500 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, 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 May 1 include cash of $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $14,000 will be made in June. Sonoma’s regular quarterly dividend of $5,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $30,000.

    Required:

    1. Prepare a monthly cash budget and supporting schedules for May, June, and July 2016. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

    Sonoma Housewares Inc.
    Cash Budget
    For the Three Months Ending July 31
    	May	June	July
    Estimated cash receipts from:
    Cash sales	$	$	$
    Collection of accounts receivable
    Total cash receipts	$	$	$
    Estimated cash payments for:
    Manufacturing costs	$	$	$
    Selling and administrative expenses
    Capital expenditures
    Other purposes:
    Income tax
    Dividends
    Total cash payments	$	$	$
    Cash increase or (decrease)	$	$	$
    Cash balance at beginning of month
    Cash balance at end of month	$	$	$
    Minimum cash balance
    Excess or (deficiency)	$	$	$

    2. The budget indicates that the minimum cash balance be maintained in July. 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 May and June, the cash balance will the minimum desired balance.

Answer 1

Sales budget:	may	june	july	total
sales	86000	90000	95000	271000
cash sales	8600	9000	9500	27100
credit sales	77400	81000	85500	243900
Collection from receivables:
form march sales	18000			18000
from April sales	50400	21600		72000
form may sales		54180	23220	77400
from June sales			56700	56700
	68400	75780	79920	224100
Manufacturing costs disbursement schedule;
for April	6000			6000
for may (30500)	24400	6100		30500
for June (35500)		28400	7100	35500
for July (40500)			32400	32400
	30400	34500	39500	104400
Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31, 2016
	May	June	July	Total
Estimated cash receipts from:
Cash sales	8600	9000	9500	27100
Collection of accounts receivable	68400	75780	79920	224100
Total cash receipts	77000	84780	89420	251200
Estimated cash payments for:
Manufacturing costs	30400	34500	39500	104400
Selling and administrative expenses	15000	16000	22000	53000
Capital expenditures	0	0	80000	80000
Other purposes:
Income tax		14000		14000
Dividends			5000	5000
Total cash payments	45400	64500	146500	256400
Cash increase or (decrease)	31600	20280	-57080	-5200
Cash balance at beginning of the month	33000	64600	84880	33000
Cash balance at end of the month	64600	84880	27800	27800
Minimum cash balance	30000	30000	30000	30000
Excess or (deficiency)	34600	54880	-2200	-2200
The budget indicates that the minimum cash balance cannot be maintained in July. This situation can be corrected by borrowing and/or by the sale of the marketable securities if they are held for such purposes. At the end of May and June, the cash balance will exceed the minimum desired balance.