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	$86,000		$90,000		$95,000
Manufacturing costs	34,000		39,000		44,000
Selling and administrative expenses	15,000		16,000		22,000
Capital expenditures	_		_		80,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% 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 $3,500 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, 80% 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 $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 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 $14,000 will be made in June. Sonoma’s regular quarterly dividend of $5,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $30,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July 2016. 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)	$	$	$

2. The budget indicates that the minimum cash balance (WILL OR WILL NOT) be maintained in July. This situation can be corrected by (INVESTING OR BORROWING) and/or by the (PURCHASE OR SALE) of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will (EXCEED OR BE SHORT OF) the minimum desired balance.

Answer 1

1.
		SONOMA HOUSEWARES INC.
		Cash Budget
		For the Three Months Ending July 31, 2016
				May		June		July
	Estimated cash receipts from:
		Cash sales	$ 8,600		$ 9,000		$ 9,500
		Collections from accounts receivable	68,400		75,780		79,920
			Total cash receipts	$ 77,000		$ 84,780		$ 89,420
	Estimated cash payments for:
		Manufacturing costs	$ 30,400		$ 34,500		$ 39,500
		Selling and administrative expenses	15,000		16,000		22,000
		Capital expenditures	-		-		80,000
		Other purposes:
			Income tax	-		14,000		-
			Dividends	-		-		5,000
			Total cash payments	$ 45,400		$ 64,500		$ 146,500
	Cash increase (decrease)	$ 31,600		$ 20,280		$ (57,080)
	Cash balance at beginning of month	33,000		64,600		84,880
	Cash balance at end of month	$ 64,600		$ 84,880		$ 27,800
	Minimum cash balance	30,000		30,000		30,000
	Excess (deficiency)		$ 34,600		$ 54,880		$ (2,200)
		Supporting calculations:
		Collections of accounts receivable:
				Sales on
				Account		Percentage		May		June		July
			March sales	$ 60,000		30%		$ 18,000		$ -		$ -
			April sales:
			Collected in May	72,000		70%		50,400		-		-
			Collected in June	72,000		30%		-		21,600		-
			May sales:
			Collected in June	86,000		70%		-		54,180		-
			Collected in July	86,000		30%		-		-		23,220
			June sales	90,000		70%		-		-		56,700
			Totals					$ 68,400		$ 75,780		$ 79,920
		Payments for manufacturing costs:
				Costs on
				Account		Percentage		Payments
			Paid in May:
			Incurred in April					$ 6,000
			Incurred in May	30,500		80%		24,400
			Total					$ 30,400
			Paid in June:
			Incurred in May	30,500		20%		$ 6,100
			Incurred in June	35,500		80%		28,400
			Total					$ 34,500
			Paid in July
			Incurred in June	35,500		20%		$ 7,100
			Incurred in July	40,500		80%		32,400
			Total					$ 39,500

2.

The budget indicates that the minimum cash balance will not be maintained in July. This is due to the capital expenditures requiring significant cash outflows during this month. This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceed the minimum desired balance, and the excess could be considered for temporary investment.