Question

Junkyard dog Pty Ltd sells toys for pre-primary children for students. Estimated sales for the second half of the coming year are:

Month Sales in units

July 10,000

August 11,400

Sept 12,000

Oct 15,600

Nov 18,000

Dec 22,000

Each unit sells for $35 and the actual revenue for May and June were $355,000 and $325,000, respectively. 30% of any month’s sales are for cash with the remaining sales on credit. 20% of the credit sales are collected in the month of sale, 70% are collected in the following month and 8% are collected in the second month after the sale. The remaining credit sales are never collected and are considered bad.

Purchase and inventory information

Junkyard likes to have 25% of the forecasted demand for the next month in closing stock and it pays for 75% of their stock in the month of purchase and the remainder in the following month. The units cost $22 each.

Other information

Non-manufacturing costs which are generally paid in the month incurred consist of:

Salaries $7,000/month

Commissions 5% of sales revenue

Rent $14,000/month

Depreciation $2,500/month

There is a scheduled dividend payment of $100,000 and $60,000 in July and Sept respectively. Junkyard also needs to make a payment of $80,000 in August for equipment previously purchased on credit in May. Junkyard maintains a minimum cash balance of $15,000 with a line of credit available to fund any shortfalls. For simplicity, assume that the bank will only lend and accept repayments in $10,000 increments (e.g., if $123,456 is needed, the bank will only lend and accept repayment of $130,000) and that months, rather than days are used for interest calculations. Interest is charged at 10% on all outstanding borrowings and this is charged and paid in the following month based on the prior month’s closing balance.

The tax rate is 30% and there are tax payments due in July of $8,000 and $19,000 in Sept.

30 June Balances

Closing stock 2,500 units at a cost of $22.50/unit

Cash at bank $26,000

Accounts Payable $280,000

Line of credit balance $50,000

Required: Prepare a cash budget for the months of July and August.

Answer 1

*) Schedule for cash collection from customers

Particulars	July	August
From accounts receivable May	$2485008%= $19880
From accounts receivable June	$227500* 70%= $159250	$227500* 8%= $18200
Cash sales	10000units *$35* 30%= $105000	11400 units* $35* 30%= $119700
From July credit sales	$245000*20%= $49000	$245000*70%= $171500
From August credit sales		$279300*20%= $55860
Total	$333,130	$365,260

Credit sales of May= $355000* 70%= $248500

Credit sales of June= $325000* 70%= $227500

Credit sales of July= 10000units *$35* 70%= $245000

August credit sales= 11400 units* $35* 70%= $279300

Material purchase budget

Particulars	July	August
Sales	10000 units	11400 units
Add: Desired ending inventory	11400*25%= 2850	12000*25%= 3000
Less: Beginning inventory	(2500)	(2850)
Total units to be purchased	10350	11550
Cost per unit	$22	$22
Total purchases	$227700	$254100

*) Schedule for cash disbursements for purchases

Particulars	July	August
Accounts payable for June	$280000
July purchases	$227700* 75%= $170775	$227700*25%= $56925
August purchases		$254100* 75%= $190575
Total	$450775	$247500

Assuming that accounts payable balance as of June 30 is related to June purchases and it will be entirely paid in July.

Cash budget for the months of July and August

Particulars	July	August
Beginning balance	$26000	$20855
Collections from customers	$333,130	$365,260
Total cash available	$359130	$386115
Cash payments;
Payment for purchases	$450775	$247500
Salaries	$7000	$7000
Commissions	10000*$35*5%= $17500	11400*$35*5%= $19950
Rent	$14000	$14000
Dividend payment	$100000
Payment towards credit for equipment purchase		$80000
Tax payments	$8000
Total payments	($597,275)	($368,450)
Excess/ Deficiency of cash	($239145)	$17665
Financing;
Borrowing	$260000   (239145+15000)
Interest		(260000*10%)/12= ($2167)
Repayments
Total financing	$260000	($2167)
Ending cash balance	$20855	$15498