Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: The cash balance on December 1 is $40,000. Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 65,000 $ 70,000 $ 83,000 Sales on account $ 400,000 $ 525,000 $ 600,000 Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. Purchases of inventory will total $280,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $161,000, all of which will be paid in December. Selling and administrative expenses are budgeted at $430,000 for December. Of this amount, $50,000 is for depreciation. A new web server for the Marketing Department costing $76,000 will be purchased for cash during December, and dividends totaling $9,000 will be paid during the month. The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed.

Required: 1. Calculate the expected cash collections for December. 2. Calculate the expected cash disbursements for merchandise purchases for December. 3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

1) EXPECTED CASH COLLECTIONS FOR DECEMBER

PARTICULARS	FIGURES IN $	WORKING NOTES
DECEMBER CASH SALES	83000
OCTOBER CREDIT SALES	72000	400000*18%
NOVEMBER CREDIT SALES	315000	525000*60%
DECEMBER CREDIT SALES	120000	600000*20%
	590000

EXPECTED CASH COLLECTION FOR DECEMBER IS $590000

2) EXPECTED CASH DISBURSEMENTS FOR MERCHANDISE IN DECEMBER

PARTICULARS	FIGURES IN $	WORKING NOTES
DECEMBER INVENTORY PURCHASE	84000	280000*30%
NOVEMBER INVENTORY PURCHASE	161000
TOTAL	245000

EXPECTED CASH DISBURSEMENTS FOR MERCHANDISE IN DECEMBER IS $245000

3) CASH BUDGET FOR DECEMBER

PARTICULARS	FIGURES IN $	WORKING NOTES
OPENING CASH	40000	280000*30%
ADD:CASH COLLECTION IN DECEMBER	590000	AS PER ANS. 1 ABOVE
ADD:BORROWINGS FROM BANKS	100000	BALANCING FIGURE OR DEFICIT (40000+590000-245000-380000-76000-9000-20000)
LESS: DISBURSEMENTS FOR MERCHANDISE IN DECEMBER	(245000)	AS PER ANS. 2 ABOVE
LESS:SELLING AND ADMINISTRATIVE EXPENSES FOR DECEMBER	(380000)	450000-50000 FOR DEPRICIATION
LESS: PAYMENT FOR WEB SERVER	(76000)
LESS : DIVIDEND PAYMENT	(9000)
CLOSING CASH	20000

figures in minus are shown in brackets.