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 $41,600. Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 81,200 $ 72,000 $ 96,200 Sales on account $ 495,000 $ 512,000 $ 684,000 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 $285,000 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 $185,000, all of which will be paid in December. Selling and administrative expenses are budgeted at $455,000 for December. Of this amount, $89,600 is for depreciation. A new web server for the Marketing Department costing $79,000 will be purchased for cash during December, and dividends totaling $10,000 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

SOLUTION

1. Schedule of expected cash collection-

Particulars	Amount ($)
December cash sales	96,200
Collection on account-
October sales ($495,000 * 18%)	89,100
November sales ($512,000 * 60%)	307,200
December sales ($684,000 * 20%)	136,800
Total cash collections	629,300

2. Schedule of expected cash disbursements-

Particulars	Amount ($)
Payment to suppliers
November purchases	185,000
Decebmer purchases ($285,000*30%)	85,500
Total cash payments	270,500

3. Cash Budget-

Particulars	Amount ($)	Amount ($)
Beginning cash balance		41,600
Add: Collections from customers		629,300
Total cash available (A)		670,900
Less: Cash disbursements-
Payment to suppliers for inventory	270,500
Selling and administrative expense (455,000-89,600)	365,400
New web server	79,000
Dividends paid	10,000
Total cash disbursements (B)		724,900
Excess of cash available over disbursements (A-B)		(54,000)
Financing:
Borrowings		74,000
Repayments		0
Interest		0
Total financing		74,000
Ending cash balance		20,000