Question

1. 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	$118,000		$142,000		$199,000
   Manufacturing costs	50,000		61,000		72,000
   Selling and administrative expenses	41,000		43,000		76,000
   Capital expenditures	_		_		48,000

   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 $7,000 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 $45,000, marketable securities of $64,000, and accounts receivable of $131,200 ($103,000 from July sales and $28,200 from August sales). Sales on account for July and August were $94,000 and $103,000, respectively. Current liabilities as of September 1 include $7,000 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 $17,000 will be made in October. Bridgeport’s regular quarterly dividend of $7,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $44,000.

   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	$	$	$
   Collection of accounts receivable
   Total cash receipts	$	$	$
   Less estimated cash payments for:
   Manufacturing costs	$	$	$
   Selling and administrative expenses
   Capital expenditures
   Other purposes:
   Income tax
   Dividends
   Total cash payments	$	$	$
   Cash increase or (decrease)	$	$	$
   Plus cash balance at beginning of month
   Cash balance at end of month	$	$	$
   Less minimum cash balance
   Excess or (deficiency)	$	$	$

   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 will 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.

Answer 1

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated cash receipts from:
Cash sales 10%	$11,800	$14,200	$19,900
Collection of accounts receivable	100,300	105,240	121,320
Total cash receipts	$112,100	$119,440	$141,220
Less estimated cash payments for:
Manufacturing costs	$41,400	$51,800	$62,800
Selling and administrative expenses	41,000	43,000	76,000
Capital expenditures			48,000
Other purposes:
Income tax		17,000
Dividends			7,000
Total cash payments	$82,400	$111,800	$193,800
Cash increase or (decrease)	$29,700	$7,640	-$52,580
Plus cash balance at beginning of month	45,000	74,700	82,340
Cash balance at end of month	$74,700	$82,340	$29,760
Less minimum cash balance	44,000	44,000	44,000
Excess or (deficiency)	$30,700	$38,340	-$14,240

Collection of accounts receivables:

	Sep	Oct	Nov
70% in the month following the sale	72,100	74,340	89,460
Remainder in second month	28,200	30,900	31,860
Total	100,300	105,240	121,320

Payment of manufacturing costs:

Depreciation is a non cash expense. Insurance and property taxes are not paid in Sep, Oct and Nov and hence will not be taken.

	Sep	Oct	Nov
80% in the same month	34,400	43,200	52,000
Balance in the following month	7,000	8,600	10,800
Total	41,400	51,800	62,800