Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations:

1. The cash balance on December 1 is $50,800.

2. Actual sales for October and November and expected sales for December are as follows:

	October		November		December
Cash sales	$	77,800	$	83,400	$	99,800
Sales on account	$	475,000	$	558,000	$	622,000

Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

3. Purchases of inventory will total $375,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $206,500, all of which will be paid in December.

4. Selling and administrative expenses are budgeted at $448,000 for December. Of this amount, $97,200 is for depreciation.

5. A new web server for the Marketing Department costing $80,000 will be purchased for cash during December, and dividends totaling $14,500 will be paid during the month.

6. The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed.

Required:

1. Calculate the expected cash collections for December.

2. Calculate the expected cash disbursements for merchandise purchases for December.

3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

1.

Cash Collection for December
Cash sales	$              99,800
20% of December Sales	$           1,24,400	=622000*20%
60% of November Sales	$           3,34,800	=558000*60%
18% of October Sales	$              85,500	=475000*18%
Total Cash Collection	$          6,44,500

2.

Cash Disbursement for Merchandise Purchase
30% of December Purchases	$           1,12,500	=375000*30%
Accounts Payable paid	$           2,06,500
Total Cash Disbursements	$          3,19,000

3.

Cash Budget (December)
Beginning Cash Balance	$              50,800
Add : Cash Collections	$           6,44,500
Total Cash Available	$           6,95,300
Less : Cash Disbursements
Merchandise Purchase	$           3,19,000
Selling & Administrative Expenses	$           3,50,800	=448000-97200
New Web Server	$              80,000
Dividend	$              14,500
Total Cash Disbursements	$           7,64,300
Preliminary Cash Balance	$            -69,000
Minimum Cash Balance Required	$              20,000
Borrowings	$              89,000
Ending Cash Balance	$              20,000