Question

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	$91,000		$117,000		$145,000
Manufacturing costs	38,000		50,000		52,000
Selling and administrative expenses	32,000		35,000		55,000
Capital expenditures	_		_		35,000

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 $9,000 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 $35,000, marketable securities of $49,000, and accounts receivable of $101,900 ($80,000 from July sales and $21,900 from August sales). Sales on account for July and August were $73,000 and $80,000, respectively. Current liabilities as of September 1 include $9,000 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 $14,000 will be made in October. Bridgeport’s regular quarterly dividend of $9,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $34,000.

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:
	$	$	$
Total cash receipts	$	$	$
Less estimated cash payments for:
	$	$	$
Other purposes:
Total cash payments	$	$	$
	$	$	$
Cash balance at end of month	$	$	$
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   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

1.

CASH BUDGET

	SEPT	OCT	NOV
ESTIMATED CASH RECEIPTS FROM:
CASH SALES	9,100	11,700	14,500
AMOUNT RECEIVED FROM PRIOR MONTH	56,000	57,330	73,710
AMOUNT RECEIVED FROM PRIOR TO PRIOR MONTH	21,900	24,000	24,570
TOTAL CASH RECEIPTS (A)	87,000	93,030	112,780
LESS: ESTIMATED CASH PAYMENTS FOR:
MANUFACTURING COSTS	23,200	32,800	34,400
AMOUNT RECEIVED FROM PRIOR MONTH	9,000	5,800	8,200
SELLING & ADMINISTRATIVE EXPENSE	32,000	35,000	55,000
CAPITAL EXPENDITURE			35,000
OTHER PURPOSES:
INCOME TAX PAYMENT		14,000
DIVIDEND			9,000
TOTAL CASH PAYMENTS (B)	64,200	87,600	141,600
CASH BALANCE AT THE END OF THE MONTH              (C) = (A) - (B)	22,800	5,430	(28,820)
CASH BALANCE AT THE START OF THE MONTH (D)	35,000	57,800	34,000*
TOTAL CASH BALANCE AT THE END OF THE MONTH    (C) + (D)	57,800	29,230	5,180
MINIMUM BALANCE REQUIREMENT	34,000	34,000	34,000
EXCESS OR (DEFICIENCY)	23,800	(4,770)	(28,820)
SHORT TERM LOAN TAKEN		4,770	28,820

* $34,000 INCLUDES LOAN AMOUNT OF $4,770.

RECEIPTS FROM SALES

	JULY	AUG	SEPT	OCT	NOV
TOTAL SALES			91,000	117,000	145,000
CASH SALES (10%)			9,100	11,700	14,500
CREDIT SALES (90%)	73,000	80,000	81,900	105,300	130,500
AMT RECEIVED NEXT MONTH (70%)	51,100	56,000	57,330	73,710	91,350
AMT RECEIVED SECOND MONTH FOLLOWING SALE (30%)	21,900	24,000	24,570	31,590	39,150

MANUFACTURING COSTS

	SEPT	OCT	NOV
MANUFACTURING COSTS	38,000	50,000	52,000
(-) DEPRECIATION, INSURANCE, PROPERTY TAXES	9,000	9,000	9,000
MONTHLY MANUFACTURING COSTS	29,000	41,000	43,000
CASH PAID IN CURRENT MONTH	23,200	32,800	34,400
CASH PAID IN FOLLOWING MONTH	5,800	8,200	8,600

2.

BALANCE OF MARKETABLE SECURITIES ON 1 SEPT = $49,000

CASH BALANCE AT THE END OF THE MONTH (A)	22,800	5,430	(28,820)
CASH BALANCE AT THE START OF THE MONTH (B)	35,000	57,800	34,000*
TOTAL CASH BALANCE AT THE END OF THE MONTH    (A) + (B)	57,800	29,230	5,180
MINIMUM BALANCE REQUIREMENT	34,000	34,000	34,000
EXCESS OR (DEFICIENCY)	23,800	(4,770)	(28,820)
MARKETABLE SECURITIES		4,770	28,820

MARKETABLE SECURITIES SOLD = 4,770 + 28,820 = $33,590