Question

Cash Budget

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

	May		June		July
Sales	$138,000		$167,000		$229,000
Manufacturing costs	58,000		72,000		82,000
Selling and administrative expenses	40,000		45,000		50,000
Capital expenditures	_		_		55,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 65% 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 $7,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. 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 May 1 include cash of $52,000, marketable securities of $75,000, and accounts receivable of $159,500 ($121,000 from April sales and $38,500 from March sales). Sales on account for March and April were $110,000 and $121,000, respectively. Current liabilities as of May 1 include $11,500 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $20,000 will be made in June. Sonoma’s regular quarterly dividend of $7,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $41,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments	$	$	$
Cash increase or (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess (deficiency)	$	$	$

Answer 1

Sonoma Housewares Inc. Cash Budget For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$13800	$16700	$22900
Collection of accounts receivable	117150	123080	141165
Total cash receipts	$130950	$139780	$164065
Less Estimated cash payments for:
Manufacturing costs	$52300	$62200	$73000
Selling and administrative expenses	40000	45000	50000
Capital expenditures			55000
Other purposes:
Income tax		20000
Dividends			7000
Total cash payments	$92300	$127200	$185000
Cash increase or (decrease)	$38650	$12580	-$20935
Cash balance at beginning of month	52000	90650	103230
Cash balance at end of month	$90650	$103230	$82295
Minimum cash balance	41000	41000	41000
Excess (deficiency)	$49650	$62230	$41295

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Working Note:

Estimated cash receipts from sales and accounts receivable

	May	June	July
From March sales	110000*35% =38500
From April sales	121000*65% =78650	121000*35% =42350
From May credit sales (90%)		(138000*90%)*65% =80730	(138000*90%)*35% =43470
From June sales			(167000*90%)*65% =97695
Total	117150	123080	141165

Manufacturing cost

**Depreciation, insurance, and property tax expense represent $7,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. 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.

may = 58000 - 7000 = 51000

For may = 51000 * 80% = 40800

For June = 51000 * 20% = 10200

June = 72000 - 7000 = 65000

For june = 65000 * 80% = 52000

For july = 65000 * 20% = 13000

July = 82000 - 7000 = 75000

For July = 75000 * 80% = 60000

	May	June	July
previous month Manu. exp	11500	10200	13000
Current period Manu. exp	40800	52000	60000
total Manu. exp.	52300	62200	73000

**All selling and administrative expenses are paid in cash in the period they are incurred.

**

Insurance	To be paid in September
Property Tax	To be paid in November
Depreciation	Non Cash Expense

So do not include in the calculation