Question

Cash Budget

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	$120,000		$146,000		$197,000
Manufacturing costs	50,000		63,000		71,000
Selling and administrative expenses	35,000		39,000		43,000
Capital expenditures	_		_		47,000

The company expects to sell about 15% of its merchandise for cash. Of sales on account, 65% 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 September, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 75% 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 $46,000, marketable securities of $65,000, and accounts receivable of $138,600 ($105,000 from April sales and $33,600 from March sales). Sales on account for March and April were $96,000 and $105,000, respectively. Current liabilities as of May 1 include $14,500 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 $18,000 will be made in June. Sonoma’s regular quarterly dividend of $7,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $36,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July. 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)	$	$	$

Answer 1

Monthly cash budget and supporting schedules for May, June, and July is as prepared below:

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	18,000	21,900	29,550
Collection of accounts receivable	101,850	103,050	116,365
Total cash receipts	119,850	124,950	145,915
Estimated cash payments for:
Manufacturing costs	57,500	56,000	64,000
Selling and administrative expenses	35,000	39,000	43,000
Capital expenditures			47,000
Other purposes:
Income tax		18,000
Dividends			7,000
Total cash payments	92,500	113,000	161,000
Cash increase or (decrease)	27,350	11,950	-15,085
Cash balance at beginning of month	46,000	73,350	85,300
Cash balance at end of month	73,350	85,300	70,215
Minimum cash balance	36,000	36,000	36,000
Excess or (deficiency)	37,350	49,300	34,215

Working:

Sonoma Housewraes Inc.
Sales Budget
For the quarter ended July 31,2014
	Month
Particulars	May	June	July	Total
Sales	120,000	146,000	197,000	463,000
Total Sales	$120,000	$146,000	$197,000	$463,000
Cash sales (15%)	18,000	21,900	29,550	69,450
Credit sales (85%)	102,000	124,100	167,450	393,550
Sonoma Housewraes Inc.
Schedule of expected Cash collections
For the quarter ended July 31,2014
	Month
Particulars	May	June	July	Total
Cash sales (15%)	18,000	21,900	29,550	69,450
Beginning Accounts Receivable (a)				0
March	33,600			33,600
April	68,250	36,750		105,000
Credit Sales (85%)				0
May		66,300	35700	102,000
June			80,665	80,665
July				0
Total collections	101,850	103,050	116,365	321,265
Sonoma Housewraes Inc.
Manufacturing Costs
For the quarter ended July 31,2014
	Month
Particulars	May	June	July	Total
Total cost	50,000	63,000	71,000	184,000
Less: Dep, Insurance and property tax	-7,000	-7,000	-7,000	-21,000
Remaining	43,000	56,000	64,000	163,000
paid in same month (75%)	32,250	42,000	48,000	122,250
Paid in next month (25%)	10,750	14,000	16,000	40,750
Total paid	43,000	56,000	64,000	163,000
Paid for April	14,500
Total paid	57,500	56,000	64,000	163,000