Question

Cash Budget

The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	January		February		March
Sales	$146,000		$180,000		$238,000
Manufacturing costs	61,000		77,000		86,000
Selling and administrative expenses	42,000		49,000		52,000
Capital expenditures	_		_		57,000

The company expects to sell about 15% of its merchandise for cash. Of sales on account, 65% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $8,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in June, and the annual property taxes are paid in October. 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. All sales and administrative expenses are paid in the month incurred.

Current assets as of January 1 include cash of $55,000, marketable securities of $79,000, and accounts receivable of $168,950 ($128,000 from December sales and $40,950 from November sales). Sales on account in November and December were $117,000 and $128,000, respectively. Current liabilities as of January 1 include a $73,000, 12%, 90-day note payable due March 20 and $8,000 of accounts payable incurred in December for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $4,400 in dividends will be received in January. An estimated income tax payment of $22,000 will be made in February. Shoe Mart's regular quarterly dividend of $8,000 is expected to be declared in February and paid in March. Management desires to maintain a minimum cash balance of $43,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for January, February, and March. Enter an increase in the month's cash balance or an excess cash amount as a positive number. Enter a decrease in the month's cash balance or a cash deficiency as a negative number. Assume 360 days per year for interest calculations.

Shoe Mart Inc.
Cash Budget
For the Three Months Ending March 31
	January	February	March
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Dividends
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Note payable (including interest)
Income tax
Dividends
Total cash payments	$	$	$
Cash increase (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess (deficiency)	$	$

Answer 1

Solution

Shoe Mart Inc

Monthly cash budget and supporting schedules for January, February and March:

Shoe Mart Inc
Cash Budget
For the Three Months Ending March 31
	January	February	March
Estimated Cash receipts from:
Cash sales	$21,900	$27,000	$35,700
Collections of accounts receivables	$124,150	$125,465	$142,885
Dividends	$4,400
Total cash receipts	$150,450	$152,465	$178,585
Cash disbursements:
Payment for manufacturing costs	$45,050	$66,600	$76,650
selling and administrative costs	$42,000	$49,000	$52,000
Capital expenditures			$57,000
Other purposes:
Notes Payable (including interest)			$75,190
Income tax payment		$22,000
Dividends			$8,000
total cash payments	$87,050	$137,600	$268,840
Cash increase (decrease)	$63,400	$14,865	($90,255)
Cash balance at the beginning of the month	$55,000	$118,400	$133,265
Cash balance at the end of month	$118,400	$133,265	$43,010
Minimum cash balancer	$43,000	$43,000	$43,000
Excess (deficiency)	$75,400	$90,265	$10

Computations:

Collections of accounts receivables:
	January	February	March	Total
collections from November sales	$40,950			$40,950
Collections from December sales	$83,200	$44,800		$128,000
Collections from January Sales		$80,665	$43,435	$124,100
Collections from February Sales			$99,450	$99,450
total	$124,150	$125,465	$142,885	$392,500
Schedule of cash payments for manufacturing costs:
	January	February	March	Total
manufacturing costs	$53,000	$69,000	$78,000	$200,000
Payments:
December manufacturing costs	$8,000			$8,000
January Manufacturing costs:	$45,050	$7,950		$53,000
February Manufacturing costs		$58,650	$10,350	$69,000
March manufacturing costs			$66,300	$66,300
Total payments	$53,050	$66,600	$76,650	$196,300

Calculation of notes payable including interest –

Notes payable $73,000

Interest at 12%, 90 days = 73,000 x 12% x 90/360 = $2,190

Total payable = 75,190

Non-cash expense of $8,000 has been deducted from each month’s manufacturing costs to arrive at actual cash payments for manufacturing costs.