Question

Management at Caribo Limited were monitoring their cash flow. They requested their accountant to prepare a cash budget for the four months ending 30 April 2016. (i) The following sales figures are for the months of November 2015 to June 2016. The figures from January 2016 onward are estimated:

Actual Sales $

November 2015 60,000

December 2015 64,000

Forecasted Sales:

January 2016 65,000

Feb 2016 70,000

march 2016 72,500

April 2016 76,250

May 2016 80,000

June 2016 78,750

Half the sales are normally paid for in the month in which they occur and the customers are rewarded with a 5% cash discount. The remaining sales are paid for net in the month following the sale.

(ii) Goods are sold at a mark-up of 25% on the goods purchased one month before sale. Half of the purchases are paid for in the month of purchase and a 4% prompt settlement discount is received. The remainder is paid in full in the following month.

(iii) Wages of $12000 per month are paid in the month in which they are earned. It is expected that the wages will be increased by 10% from 1 March 2016.

(iv) Rent will cost $60000 per annum payable three monthly in advance in January, April, July and December each year.

(v) The directors have arranged a bank loan of $60000 which would be credited to company’s current account in February 2016. (

vi) The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid on 15 January 2016.

(vii) The ordinary dividend of $12000 for the year 2015 will be paid in March 2016.

(viii) The bank balance at 31 December 2015 is $12000.

Required:

1) Prepare a cash budget for the four months ended 30 April 2016.

2) How does management use the cash budget for making decisions?

Answer 1

Cash Budget:
Beginning cash balance	$    12,000.00	$                   -	$    44,905.00	$    30,863.00
add cash collections	$    62,875.00	$    65,750.00	$    69,438.00	$    72,469.00
total cash available	$    74,875.00	$    65,750.00	$ 1,14,343.00	$ 1,03,332.00
Less cash disbursements:
for inventory	$    52,880.00	$    55,840.00	$    58,280.00	$    61,220.00
for wages	$    12,000.00	$    12,000.00	$    13,200.00	$    13,200.00
for rent	$    15,000.00			$    15,000.00
bank loan		$    60,000.00
Interest on debentures	$      8,000.00
Dividend			$    12,000.00
Overdraft	$    13,005.00	$    13,005.00
Closing	$                   -	$    44,905.00	$    30,863.00	$    13,912.00