Question

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	$119,000		$148,000		$189,000
Manufacturing costs	50,000		64,000		68,000
Selling and administrative expenses	35,000		40,000		42,000
Capital expenditures	_		_		45,000

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 $9,000 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, 85% 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 $45,000, marketable securities of $64,000, and accounts receivable of $132,500 ($104,000 from April sales and $28,500 from March sales). Sales on account for March and April were $95,000 and $104,000, respectively. Current liabilities as of May 1 include $10,500 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 $18,000 will be made in June. Sonoma’s regular quarterly dividend of $9,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $35,000.

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)	$	$	$

2. The budget indicates that the minimum cash balance (will, will not) be maintained in July. This situation can be corrected by (investing, borrowing) and/or by the (purchase, sale) of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will (exceed, be short of) the minimum desired balance.

Answer 1

1.

Sonoma Housewares Inc. Cash Budget For The Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$11,900 (119,000*10%)	$14,800 (148,000*10%)	$18,900 (189,000*10%)
Collection of accounts receivable	101,300	106,170	125,370
Total cash receipts	113,200	120,970	144,270
Estimated cash payments for:
Manufacturing costs	45,350	52,900	58,400
Selling and administrative expenses	35,000	40,000	42,000
Capital expenditures			45,000
Other purposes:
Income tax		18,000
Dividends			9,000
Total cash payments	80,350	110,900	154,400
Cash increase or (decrease)	32,850	10,070	-10,130
Cash balance at the beginning of month	45,000	77,850	87,920
Cash balance at the end of month	77,850	87,920	77,790
Minimum cash balance	35,000	35,000	35,000
Excess (deficiency)	$42,850	$52,920	$42,790

	May	June	July
Cash collections:
Accounts receivable	$101,300 (28,500+104,000*70%)	$31,200 (104,000*30%)
May sales		74,970 (119,000*90%*70%)	$32,130 (119,000*90%*30%)
June sales			93,240 (148,000*90%*70%)
Total	$101,300	$106,170	$125,370

	May	June	July
Cash payments:
Accounts payable balance	$10,500
May cost	34,850 (50,000-9,000)*85%)	6,150 (50,000-9,000)*15%)
June cost		46,750 (64,000-9,000)*85%)	8,250 (64,000-9,000)*15%)
July cost			50,150 (68,000-9,000)*85%)
Total	$45,350	$52,900	$58,400

2.

The budget indicates that the minimum cash balance will be maintained in July. This situation can be corrected by investing or by purchase of marketable securities if they are held for such purposes. At the end of May and June, the cash balance will exceed the minimum desired balance.