Question

Following are the budgeted income statements for the second quarter of 2016 for SeaTech, Inc.:

	April				May				June
Sales	$	280,000			$	340,000			$	380,000
Cost of goods sold*		192,000				228,000				252,000
Gross profit	$	88,000			$	112,000			$	128,000
Operating expenses†		44,000				50,000				54,000
Operating income	$	44,000			$	62,000			$	74,000

^* Includes all product costs (i.e., direct materials, direct labor, and manufacturing overhead).

^† Includes all period costs (i.e., selling, general, and administrative expenses).
  

The company expects about 30% of sales to be cash transactions. Of sales on account, 60% are expected to be collected in the first month after the sale is made, and 40% are expected to be collected in the second month after sale. Depreciation, insurance, and property taxes represent $24,000 of the estimated monthly cost of goods sold and $16,000 of the estimated monthly operating expenses. The annual insurance premium is paid in January, and the annual property taxes are paid in August. Of the remainder of the cost of goods sold and operating expenses, 80% are expected to be paid in the month in which they are incurred, and the balance is expected to be paid in the following month.

Current assets as of April 1, 2016, consist of cash of $28,000 and accounts receivable of $299,600 ($209,720 from March credit sales and $89,880 from February credit sales). Current liabilities as of April 1 consist of $36,000 of accounts payable for product costs incurred in March; $9,200 of accrued liabilities for operating expenses incurred in March; and a $80,000, 12%, 120-day note payable that is due on April 17, 2016.

An estimated income tax payment of $80,000 will be made in May. The regular quarterly dividend of $32,000 is expected to be declared in May and paid in June. Capital expenditures amounting to $34,400 will be made in April.

Required:

a. Complete the monthly cash budgets for the second quarter of 2016 using the following format. Note that the ending cash balance for June is provided as a check figure. (Use 360 days year for calculations.)

Answer 1

Cash Budget for the Second Quarter of 2016

Particulars	Apr	May	Jun	Total
Opening Balance	28000	173952	231600	28000
Receipts :
Cash Sales (30%)	84000	102000	114000	300000
Credit Sales (Refer Note 1 below)	215712	201488	221200	638400
Payments :
Cost of Goods Sold (Refer Note 2 & 3)	28800	141600	196800	367200
Operating Expenses (Refer Note 2 & 4)	7360	24240	32800	64400
Note Paid including interest Interest = $ 80000*12%*(120 days/360 days)	83200			83200
Income Tax		80000		80000
Dividend			32000	32000
Capital Expenditure	34400			34400
Closing Balance	173952	231600	305200	305200

Note 1 - Credit Sales and its realization -

Particulars	Apr	May	Jun
Credit Sales(70% of month sale)	196000	238000	266000
Collection of Credit Sales - 60 % in following month - 40 % in second month after sale	125832 89880 Total - 215,712	117600 83888 Total - 201,488	142800 78400 Total - 221,200

Note 2 -

- Depreciation being non cash expense will not be taken into consideration while preparing cash budget.

- Property Tax and Insurance expenditure is paid annually in Aug and Jan which months are outside the purview of quarter for which cash budget is being prepared.

- Balance of Cost of Goods Sold and Operating Expenses would be considered while preparing cash budget.

Note 3 -

Calculation of Balance of Cost of Goods Sold to be considered in cash budget of the quarter under consideration  

Particulars	Apr	May	Jun
Cost of Goods Sold	192000	228000	252000
Less : Depreciation, Propert Tax and Insurance	24000	24000	24000
Balance of Cost of Goods Sold	168000	204000	228000
80 % in following month (A)	28800	134400	163200
20 % in second month (B)		7200	33600
Total (A+B)	28800	141600	196800

Note 4 -

Calculation of Balance of Operating Expenses to be considered in cash budget of the quarter under consideration  

Particulars	Apr	May	Jun
Operating Expenses	44000	50000	54000
Less : Depreciation, Propert Tax and Insurance	16000	16000	16000
Balance of Operating Expense	28000	34000	38000
80 % in following month (A)	7360	22400	27200
20 % in second month (B)	0	1840	5600
Total (A+B)	7360	24240	32800