Question

Below is the abbreviated cash budget for DEF Pty Ltd.

Beginning Cash Balance
Estimated Cash Receipts		34,000
Cash Available		39,000
Estimated Cash Payments
Purchases
Operating Expenses	13,000
Payment of Dividend	10,000
Total Estimated Cash Payments
Ending Cash Balance		-4,000

(a) Calculate the amount of Beginning Cash Balance, Purchases, and Total Estimated Cash Payments.

(b) What action if any should DEF Pty Ltd take as a result of preparing this budget? Briefly justify your answer.

Answer 1

• Requirement [a]

Beginning Cash Balance		$5,000
Estimated Cash Receipts		$34,000
Cash Available		$39,000
Estimated Cash Payments
Purchases	$20,000
Operating Expenses	$13,000
Payment of Dividend	$10,000
Total Estimated Cash Payments		$43,000
Ending Cash Balance		($4,000)

--Working

Beginning Cash Balance		=39000-34000
Estimated Cash Receipts		34000
Cash Available		39000
Estimated Cash Payments
Purchases	=43000-13000-10000
Operating Expenses	13000
Payment of Dividend	10000
Total Estimated Cash Payments		=39000-(-4000)
Ending Cash Balance		-4000

• Requirement [b]

>The budget discloses that Total estimated cash payments ($43000) will exceed $ 39000 of cash available.
>This would lead to $ 4000 of funds being in deficit, as the cash shortfall by $ 4000.
>Hence, the action that should be taken is to BORROW centain funds in advance, based on the desired ending cash balance required.
>If funds have been borrowed in advance, say for $ 5000, the cash available would be $ 44000 (39000 + 5000).
Cash payments would be $ 43000
Now, the cash wont fall short,as ending balance would be = $ 44000 – 43000 = $ 1000