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	$93,000		$112,000		$151,000
Manufacturing costs	39,000		48,000		54,000
Selling and administrative expenses	27,000		30,000		33,000
Capital expenditures	_		_		36,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% 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 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 $35,000, marketable securities of $50,000, and accounts receivable of $110,600 ($81,000 from April sales and $29,600 from March sales). Sales on account for March and April were $74,000 and $81,000, 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 $13,000 will be made in June. Sonoma’s regular quarterly dividend of $8,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $27,000.

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   be maintained in July. 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 May and June, the cash balance will   the minimum desired balance.

Answer 1

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	9,300	11,200	15,100
Collection of accounts receivable	78,200	82,620	93,960
Total cash receipts	87,500	93,820	1,09,060
Estimated cash payments for:
Manufacturing costs	36,850	38,650	45,100
Selling and administrative expenses	27,000	30,000	33,000
Capital expenditures			36,000
Other purposes:
Income tax		13,000
Dividends			8,000
Total cash payments	63,850	81,650	1,22,100
Cash increase or (decrease)	23,650	12,170	-13,040
Cash balance at beginning of month	35,000	58,650	70,820
Cash balance at end of month	58,650	70,820	57,780
Minimum cash balance	27,000	27,000	27,000
Excess or (deficiency)	31,650	43,820	30,780
Working:
Sonoma Housewares Inc.
Sales Budget
For the quarter ended July 31
	Month
Particulars	May	June	July	Total
Sales	93,000	1,12,000	1,51,000	3,56,000
Cash sales (10%)	9,300	11,200	15,100	35,600
Credit sales (90%)	83,700	1,00,800	1,35,900	3,20,400
Sonoma Housewares Inc.
Schedule of expected Cash collections
For the quarter ended July 31
	Month
Particulars	May	June	July	Total
Cash sales (10%)	9,300	11,200	15,100	35,600
Beginning Accounts Receivable (a)
March	29,600			29,600
April	48,600	32,400		81,000
Credit Sales (88%)
May		50,220	33,480	83,700
June			60,480	60,480
July
Total collections	78,200	82,620	93,960	2,54,780
Sonoma Housewares Inc.
Manufacturing Costs
For the quarter ended July 31
	Month
Particulars	May	June	July	Total
Total cost	39,000	48,000	54,000	1,41,000
Less: Dep, Insurance and property tax	-8,000	-8,000	-8,000	-24,000
Remaining	31,000	40,000	46,000	1,17,000
paid in same month (85%)	26,350	34,000	39,100	99,450
Paid in next month (15%)		4,650	6,000	10,650
Total paid	26,350	38,650	45,100	1,10,100
Paid for April	10,500			10,500
Total paid	36,850	38,650	45,100	1,20,600

Solution 2:

The budget indicates that the minimum cash balance will not be maintained in July. This situation can be corrected by borrowing or by the Sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceeds the minimum desired balance.

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