Question

Prepare a cash budget (using info from the Sales Budget and purchases budget shown below) for January through March and for the first quarter in total. The company maintains a minimum cash balance of $50,000.00, and this was the balance in the cash account on January 1. Past experience shows that 30% of sales are collected in the month of the sale, and 70% in the month following the sale. Labor cost is $15 per unit. Other expenses include $37,000 per month for rent, $4,000 for advertising, and $6,000 per month for depreciation. All costs are paid in the current month except inventory purchases, which are paid in the month following purchase (i.e. January purchases are paid in February). On January 1^st there was an accounts receivable balance of $60,000 and an outstanding accounts payable balance of $100,000. The company has an open line of credit with a bank and can borrow at an annual rate of 12%. For simplification assume that all loans are made at the beginning of the month when borrowing is needed and repayments are made at the end of a month when there is enough cash to make the payment. Also, interest is only paid at the time when a repayment is made. Additionally, all loans and repayments (not the interest portion) can only be made in increments of $1000 and the company would like to pay its debts, or a portion thereof, as soon as it has enough cash to do so.

SALES BUDGET

Month	December	January	February	March	April
Budgeted Unit Sales	$40,000	$90,000	$80,000	$70,000	$40,000
Selling Price Per Unit	$40	$40	$40	$40	$40
Sales Revenue	$160,000	$360,000	$320,000	$280,000	$160,000

PURCHASES BUDGET

Month	January	February	March
Sales (Units)	40,000	90,000	80,000
Ending Inventory	45,000	40,000	20,000
Beginning Inventory	-20000	-45000	-40000
Budgeted Purchases (Units)	65000	85000	60000
Price Per Unit	$15	$15	$15
Budgeted Purchases ($)	$975,000	$1,275,000	$900,000

Answer 1

Cash Budget is as prepared below:

Cash Budget
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Beginning Cash balance	50,000	74,000	1,263,000	50,000
Add: Collection from customers	$1,140,000	$3,480,000	$3,080,000	7,700,000
cash available for use	$1,190,000	$3,554,000	$4,343,000	$7,750,000
Less: cash Disbursements
Material Cost	$100,000	$975,000	$1,275,000	$2,350,000
Labour Cost	975,000	1,275,000	900,000	$3,150,000
Rent Expense	37,000	37,000	37,000	$111,000
Advertising Expense	4,000	4,000	4,000	$12,000
Total disbusrement	1,116,000	2,291,000	2,216,000	$5,623,000
Cash surplus/Deficit	74,000	1,263,000	2,127,000	2,127,000
Financing
Borrowing				0
Repayment				0
Interest				0
Net cash from Financing	0	0	0	0
Budgeted ending cash balance	74,000	1,263,000	2,127,000	2,127,000
Schedule of expected Cash collections
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Sales units	90,000	80,000	70,000	240,000
Unit Price	40	40	40	40
Sales	3,600,000	3,200,000	2,800,000	9,600,000
Cash collected in same month (30%)	1,080,000	960,000	840,000	2,880,000
Cash collected in following month (70%)
Account Receivable	60,000			60,000
January Sales (3,600,000*.7)		2,520,000		2,520,000
February sales (3,200,000*.7)			2,240,000	2,240,000
Total collections	1,140,000	3,480,000	3,080,000	7,700,000
Schedule of expected Cash payments
For the quarter ended March 31
	Month
Particulars	January	February	March	Total
Purchases	975,000	1,275,000	900,000	3,150,000
				0
Cash paid in following month (100%)
Account Payable	100,000			100,000
January purchases		975,000		975,000
February sales (320,000*.7)			1,275,000	1,275,000
Total payments	100,000	975,000	1,275,000	2,350,000
Labour Cost paid	65,000*15	85,000*15	60,000*15
	975,000	1,275,000	900,000