Question

Here are some important figures from the budget of Wise Corporation for the third quarter of 2020:

---------	July	August	September
Credit sales	$1,275,800	$1,483,500	$1,096,300
Credit purchases	765,480	890,160	657,780
Cash disbursements
Wages , taxes and expenses	348,600	395,620	337,150
Interest	29,900	29,900	29,900
Equipment	0	158,900	96,300
Credit sales collection
Collected in month of sale	35%
Collected month after sale	60%
Never Collected	5%
June Credit sales	$1,135,020
June Credit purchases	$681,012

Beginning Cash balance $425,000

All credit purchases are paid in the following month after the purchase.

Instructions:

a) Using the above information, complete the following cash budget. (15 points)

	July	August	September
Beginning cash balance
Cash receipts:
Cash collections from credit sales
Total cash available

Cash disbursements:
Payments for purchases
Wages, taxes, and expenses
Interest
Equipment purchases
Total cash disbursements
Ending cash balance

b) What are the steps in preparing cash budget? Explain. (5 points)

Answer 1

Preperation of cash budget:

(Figures in $)

Particulars	July	August	September
Opening Cash Balance	425000	493030	427835
Cash receipts:
Cash collection from credit sales: 60% of previous month 35% of this month	1127542	1284705	1273805
Total cash available	1552542	1777735	1701640
Cash disbursements:
Payment for purchases	681012	765480	890160
Wages, taxes and expenses	348600	395620	337150
Interest	29900	29900	29900
Equipment purchase	-	158900	96300
Total cash disbursement	1059512	1349900	1353510
Ending cash balance	493030	427835	348130

(b) Steps in preparation of cash budget:

Cash budget shows cash receipts and payments made during a particular month. It accounts for cash sales generated during the month, cash recieved from debtors during the month, other cash incomes if any during the month, cash purchases made during the month, cash paid to creditors during the month, payments made during the month like payment to workers, other expenses etc. As such steps involved in cash budget are

1. Deciding about the time period of cash budget: For what time period like how many months it is to be prepared. It depends upon purpose of preparing cash budget

2. Estimating figures: certain estimates are required to be made like sales , purchases, payments of wages, interest , other expenses. the major consideration after making total estimation about these figures will be, deciding the time lag and deciding about cash receipts and payments during particular month. In other words figures in cash budget will be recorded on the basis of cash basis not accrual basis.

3. Deciding about mothod to be followed for preparing cash budget: Repeipts and payments method, adjusted profit and loss method or balance sheet method.

4. Preparation of the budget: Actual preparation of the cash budget considering above steps