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	$98,000		$117,000		$157,000
Manufacturing costs	41,000		50,000		57,000
Selling and administrative expenses	34,000		35,000		60,000
Capital expenditures	_		_		38,000

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 $6,000 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 $37,000, marketable securities of $53,000, and accounts receivable of $109,400 ($86,000 from July sales and $23,400 from August sales). Sales on account for July and August were $78,000 and $86,000, respectively. Current liabilities as of September 1 include $6,000 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 $14,000 will be made in October. Bridgeport’s regular quarterly dividend of $6,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $36,000.

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:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Less estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments	$	$	$
Cash increase or (decrease)	$	$	$
Plus cash balance at beginning of month
Cash balance at end of month	$	$	$
Less minimum cash balance
Excess or (deficiency)	$	$	$

Feedback

The primary source of estimated cash receipts is from cash sales and collections on account.

To estimate cash receipts from cash sales and collections on account, a schedule of collections from sales is prepared.

Learning Objective 5.

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

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated cash receipts from:
Cash sales	$9,800($98,000*10%)	$11,700($117,000*10%)	$15,700($157,000*10%)
Collection from account receivable	$83,600	$87,540	$100,170
Total cash receipts	$93,400	$99,240	$115,870
Less estimated cash payments for:
Manufacturing costs	$34,000	$42,200	$49,600
Selling and administrative expenses	$34,000	$35,000	$60,000
Capital expenditures			$38,000
Other purposes:
Income tax		$14,000
Dividends			$9,000
Total cash payments	$68,000	$91,200[$14,000+35,000+42,200]	$156,600 [$49,600+60,000+38,000+9,000]
PLUS cash balance at beginning of month	$37,000	$62,400	$70,440
Cash balance at end of month	$62,400[$37,000+$93,400-$68,000]	$70,440[$99,240-$91,200+$62,400]	$29,710[$115,870-$156,600+$70,440]
LESS minimum cash balance	$36,000	$36,000	$38,000
Excess or (deficiency)	$26,400($62,400-36,000)	$34,440 [$70,440-36,000]	-$8,290($29,710-$38,000)

sales receipts

	Sept	Oct	Nov
cash sales	$9,800($98,000*10%)	$11,700($117,000*10%)	$15,700($157,000*10%)
from july sales	$23,400
from august sales	$60,200($86,000*70%)	$25,800($86,000*30%)
from sept sales		$61,740($98,000*90%credit sales*70%)	$26,460($98000*90%*30%)
from oct sales			$73,710($117,000*90%*70%)
Total receipt from credit sale	$83,600	$87,540	$100,170

manufacturing cost

$6,000 will be deducted as depreciation is a non cash expense and insurance and property taxes payment date does not fall within our period.so there will be no cash outflow.

	Sep	Oct	Nov
	$41,000	$50,000	$57,000
less: non cash	$6,000	$6,000	$6,000
manuacuring cost	$35,000	$44,000	$51,000
payment for august	$6,000
payment for sept	$28,000($35,000*80%)	$7,000($35,000*20%)
payment for oct		$35,200($44,000*80%)	$8,800($44,000*20%)
payment for nov			$40,800($51,000*80%)
Total	$34,000(6,000+28,000)	$42,200[$35,200+7,000]	$49,600

2) The budget indicates that the minimum cash balance   cannot be maintained in November. This situation can be corrected by sale of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will exceed the minimum desired balance.