Question

Q.2 ABC Ltd., has been facing cash shortage problem for many years. You have just joined the company and made the proposal to prepare cash budget for controlling of cash shortage problem. Management has given you the green signal to prepare the cash budget and made the projection for requirement of cash through commercial bank channel in the coming period. The following information were gathered for preparing the cash budget. 1. Sales budgets November, 2019…………………………. Rs.200,000 December, 2019…………………………… 300,000 January, 2020…………………………….. 400,000 February, 2020…………………………… 500,000 March, 2020……………………………….. 600,000 All sales are made on credit basis and customers follow the following patter to pay; A) 40 % pay in the month of sales. B) 50 % in the following month of sales. C) 10 % pay in the second month of sales. 2. Purchase budgets 3. Purchases are made equal to 60 % of the respective month sales at beginning of the month. 50% of purchase amount is paid in the month of purchases and 50% in the following month of purchases 4. Cash operating expenses per month is estimated Rs.80,000. 5. Dividend is expected to be paid Rs.100,000 in the month of January, 2020. 6. Tax is to be paid Rs.50,000 in the month of march, 2020. 7. A new plant costing Rs. 250,000 to be purchased in the month of Feb.,2020. 8. Cash on hand on 1st January, 2020 is Rs.100,000. 9. A minimum cash balance of Rs.150,000 to be maintained from 31st January,2020 on ward, company has made arrangement with the local bank a line of credit to meet its cash requirement and if excess cash available it would be paid to bank to pay the loan. Required: Prepare a cash budget for the month of January, February, March, 2020. (Marks-10)

Answer 1

Cash Budget	January	February	March
Beginning cash Balance	100000	150000	150000
Cash receipt from sale	330000	430000	530000
Total Cash Available	430000	580000	680000
Less: Total Cash Payment	390000	600000	460000
Preliminary Cash Balance	40000	-20000	220000
Cash Borrowed/Repaid	110000	170000	-70000
Ending Cash Balance	150000	150000	150000

Explanations :-

Cash Collection Budget	January	February	March
Total Sales	400000	500000	600000
(A) Cash collected in same month (40%)	160000	200000	240000
(B) Cash collected in following month (50%)	150000	200000	250000
(C) Cash collected in 2nd month of sale (10%)	20000	30000	40000
Total cash collection (A)+(B)+(C)	330000	430000	530000
Cash Payment Budget	January	February	March
Total Sales	400000	500000	600000
Total Purchase (60% of sale)	240000	300000	360000
(A) Cash paid in same month (50%)	120000	150000	180000
(B) Cash paid in following month (50%)	90000	120000	150000
(C) Total cash payment for purchase (A)+(B)	210000	270000	330000
(D) Cash operating expense	80000	80000	80000
(E) Dividend	100000
(F) Tax to be Paid			50000
(G) Payment for New Plant Equipment		250000
Total Cash Payment (C)+(D)+(E)+(F)+(G)	390000	600000	460000