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	$114,000		$138,000		$185,000
Manufacturing costs	48,000		59,000		67,000
Selling and administrative expenses	40,000		41,000		70,000
Capital expenditures	_		_		44,000

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 $7,000 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 $43,000, marketable securities of $62,000, and accounts receivable of $127,300 ($100,000 from July sales and $27,300 from August sales). Sales on account for July and August were $91,000 and $100,000, respectively. Current liabilities as of September 1 include $7,000 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 $17,000 will be made in October. Bridgeport’s regular quarterly dividend of $7,000 is expected to be declared in October and paid in November. Management desires to maintain a minimum cash balance of $42,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for September, October, and November. 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)	$	$
Less cash balance at beginning of month
Cash balance at end of month	$	$	$
Plus minimum cash balance
Excess or (deficiency)	$	$	$

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 will  be maintained in November. This situation can be corrected by investing  and/or by the purchase  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.

Answer 1

Dash Shoes Inc.
Cash Budget
	September	October	November
Estimated cash receipts from:
Cash sales 10% of sales	11400	13800	18500
Collection of accounts receivable	97300	101820	117720
Total cash receipts	108700	115620	136220
Estimated cash payments for:
Manufacturing costs	39800	49800	58400
Selling and administrative expenses	40000	41000	70000
Capital expenditures			44000
Other purposes:
Income tax		17000
Dividend			7000
Total cash payments	79800	107800	179400
Cash increase or (decrease)	28900	7820	-43180
Cash balance at beginning of month	43000	71900	79720
Cash balance at end of month	71900	79720	36540
Minimum cash balance	42000	42000	42000
Excess or (deficiency)	29900	37720	-5460

workings

	September	October	November
Collection of accounts receivable
July sales	27300
August sales 70%*100000 , 30%*100000	70000	30000
Sep Sales 114000*90%*70%,114000*90%*30%		71820	30780
Oct sales 138000*90% *70%			86940
Nov Sales
Collection of accounts receivable	97300	101820	117720
Cash payment for manufactuing cost
Beginning Creditor 20% of (manfactuing cost – 7000)	7000	8200	10400
Current month disbursement
(48000-7000)*80%	32800
(59000-7000)*80%		41600
(67000-7000)*80%			48000
Cash payment for manufactuing cost	39800	49800	58400

Part 2

At the end of September and October, the cash balance will exceed  the minimum desired balance.