Question

Cash Budget

The controller of Bridgeport Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	September		October		November
Sales	$118,000		$140,000		$201,000
Manufacturing costs	50,000		60,000		72,000
Selling and administrative expenses	41,000		42,000		76,000
Capital expenditures	_		_		48,000

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 $8,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in January, and the annual property taxes are paid in December. 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 September 1 include cash of $45,000, marketable securities of $64,000, and accounts receivable of $131,200 ($103,000 from July sales and $28,200 from August sales). Sales on account for July and August were $94,000 and $103,000, respectively. Current liabilities as of September 1 include $8,000 of accounts payable incurred in August for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $17,000 will be made in October. Bridgeport’s regular quarterly dividend of $8,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $44,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for September, October, and November. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. Assume 360 days per year for interest calculations.

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated cash receipts from:
Less minimum cash balance	$	$	$
Total cash receipts	$	$	$
Less estimated cash payments for:
	$	$	$
Other purposes:
Total cash payments	$	$	$
	$	$	$
Cash balance at end of month	$	$	$
Excess or (deficiency)	$	$	$

2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

The budget indicates that the minimum cash balance   be maintained in November. This situation can be corrected by   and/or by the   of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will   the minimum desired balance.

Answer 1

Cash Budget:

	September	October	November
Beginning Cash Balance	45,000	74,500	84,740
Collections	112,100	119,240	140,160
Total Available	157,100	193,740	224,900
Less: Payments: Manufacturing cost	41,600	50,000	61,600
Selling and Admin Expenses	41,000	42,000	76,000
Income Tax payment		17,000
Dividend			8,000
Capital Expenditure			48,000
Total Payments	82,600	109,000	193,600
Ending Cash Balance	74,500	84,740	31,300

Schedule 1: Collection from customers:

	September	October	November
Cash Sales 10%	11,800	14,000	20,100
70% of credit sales in following month	72,100	74,340	88,200
30% in second month	28,200	30,900	31,860
Collections	112,100	119,240	140,160

Schedule 2: Payments:

	Sep	Oct	Nov
80% in the same month	33,600	41,600	51,200
20% in the next month	8,000	8,400	10,400
Total Payments	41,600	50,000	61,600

2. the budget indicates that the minimum cash balance WILL NOT BE maintained in November. This situation can be corrected by BORROWING and/or by the SELLING of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will BE  the minimum desired balance.