Question

Cash Budget

The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	January		February		March
Sales	$132,000		$166,000		$218,000
Manufacturing costs	55,000		71,000		78,000
Selling and administrative expenses	38,000		45,000		48,000
Capital expenditures	_		_		52,000

The company expects to sell about 12% of its merchandise for cash. Of sales on account, 65% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in June, and the annual property taxes are paid in October. 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. All sales and administrative expenses are paid in the month incurred.

Current assets as of January 1 include cash of $50,000, marketable securities of $71,000, and accounts receivable of $153,100 ($116,000 from December sales and $37,100 from November sales). Sales on account in November and December were $106,000 and $116,000, respectively. Current liabilities as of January 1 include a $66,000, 12%, 90-day note payable due March 20 and $10,000 of accounts payable incurred in December for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $4,000 in dividends will be received in January. An estimated income tax payment of $20,000 will be made in February. Shoe Mart's regular quarterly dividend of $10,000 is expected to be declared in February and paid in March. Management desires to maintain a minimum cash balance of $39,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for January, February, and March. Enter an increase in the month's cash balance or an excess cash amount as a positive number. Enter a decrease in the month's cash balance or a cash deficiency as a negative number. Assume 360 days per year for interest calculations.

Shoe Mart Inc.
Cash Budget
For the Three Months Ending March 31
	January	February	March
Estimated cash receipts from:
Cash sales	$_____	$_____	$_____
Collection of accounts receivable	$_____	$_____	$_____
Dividends	$_____	$_____	$_____
Total cash receipts	$_____	$_____	$_____
Estimated cash payments for:
Manufacturing costs	$_____	$_____	$_____
Selling and administrative expenses	$_____	$_____	$_____
Capital expenditures	$_____	$_____	$_____
Other purposes:
Note payable (including interest)	_____	_____	_____
Income tax	_____	_____	_____
Dividends	_____	_____	_____
Total cash payments	$_____	$_____	$_____
Cash increase (decrease)	$_____	$_____	$_____
Cash balance at beginning of month	______	______	______
Cash balance at end of month	$_____	$_____	$_____
Minimum cash balance	______	______	_____
Excess (deficiency)	$_____	$_____	_____

2. The budget indicates that the minimum cash balance will not be maintained in March. This is due primarily to which of the following causes?

1. Capital expenditures
2. Note repayment
3. Depreciation
4. Income taxes
5. Decreased collection of accounts receivable

Select the correct answer

• I, II, III, IV, and V
• I and II only.
• III, IV, and V only.
• IV and V only.

Answer 1

1.

Cash Budget	January	February	March
Estimated Cash receipts from:
Cash sales	$15840	$19920	$26160
Collections from accounts receivable	1,12,500	1,16,104	1,35,608
Dividends	4000
Total Cash Receipts	132340	136024	161768
Estimated cash Payment
Manufacturing cost	46000	57800	66600
Selling and administrative expense	38000	45000	48000
Capital expenditure			52000
Other purposes:
Notes payable ( including interest)			67980
Income tax		20000
Dividends			10000
Total Cash Payments	84000	122800	244580
Cash increase(decrease)	48340	13224	-82812
Cash balance at beginning of month	50000	98340	111564
Cash balance at end of month	98340	111564	28752
Minimum cash balance	39000	39000	39000
Excess (deficiency)	$59340	$72564	$-10248
Supporting Calculations
Interest =(66000*12%*90/360) = $1980
Sales budget	January	February	March
Cash Sale	15,840	19,920	26,160
Sales on Account	1,16,160	1,46,080	1,91,840
Total Budgeted Sales	1,32,000	1,66,000	2,18,000
Schedule of Cash receipts	January	February	March
Current Cash Sales	15,840	19,920	26,160
Plus collection from A/R	1,12,500	1,16,104	1,35,608
Total Collection	1,28,340	1,36,024	1,61,768

Collections of accounts receivable
	Sales on account	Percentage	January	February	March
November	106000	35%	37100
December	116000
Collected in January		65%	75400
Collected in February		35%		40600
January sales	116160
Collected in February		65%		75504
Collected in March		35%			40656
February sales	146080	65%			94952
Total Collections from Accounts Receivable			112500	116104	135608

Payments for Manufacturing cost	January	February	March
Manufacturing cost	55000	71000	78000
Depreciation insurance property tax	10000	10000	10000
	45000	61000	68000
80% in month of sale	36000	48800	54400
20% in next month	10000	9000	12200
Total	46000	57800	66600

2. Correct answer is (b) - I and II only i.e.

I Capital expenditures

II Note repayment