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	$97,000		$116,000		$157,000
Manufacturing costs	41,000		50,000		57,000
Selling and administrative expenses	34,000		35,000		60,000
Capital expenditures	_		_		38,000

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 $37,000, marketable securities of $52,000, and accounts receivable of $108,400 ($85,000 from July sales and $23,400 from August sales). Sales on account for July and August were $78,000 and $85,000, 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 $14,000 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 $36,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for September, October, and November. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. 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)	$	$	$
Plus cash balance at beginning of month
Cash balance at end of month	$	$	$
Less 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 be maintained in November. This situation can be corrected by and/or by the of the marketable securities, if they are held for such purposes. At the end of September and October, the cash balance will the minimum desired balance.

Answer 1

1.

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated Cash Receipts from
Cash Sales (Working no 1)	9,700.00	11,600.00	15,700.00
Collection of Accounts Receivable (Working No 1)	82,900.00	86,610.00	99,270.00
Total Cash Receipts	92,600.00	98,210.00	114,970.00
Less: Estimated Cash Payments For:
Manufacturing Costs (Working No 2)	34,200.00	41,200.00	48,600.00
Selling and Administrative Expenses (Working No 3)	34,000.00	35,000.00	60,000.00
Capital Expenditure:	-	-	38,000.00
Other Purposes:
Income Tax	-	14,000.00	-
Dividend	-	-	7,000.00
Total Cash Payments	68,200.00	90,200.00	153,600.00
Cash Increase or (decrease)	24,400.00	8,010.00	(38,630.00)
Plus Cash at the beginning of the month	37,000.00	61,400.00	69,410.00
Cash Balance at the end of the month	61,400.00	69,410.00	30,780.00
Less: Minimum Cash Balance	36,000.00	36,000.00	36,000.00
Excess or (Deficiency)	25,400.00	33,410.00	(5,220.00)

Working No 1
Collections
	September	October	November
Sales	97,000.00	116,000.00	157,000.00
Cash Sales (10%)	9,700.00	11,600.00	15,700.00
Credit sales collection	87,300.00	104,400.00	141,300.00
Credit sales collection
July	23,400.00
August	59,500.00	25,500.00
September		61,110.00	26,190.00
October			73,080.00
Total Collection	82,900.00	86,610.00	99,270.00

Working No 2
Manufacturing Cost Paid
	September	October	November
Manufacturing Cost	41,000.00	50,000.00	57,000.00
Less: Depreciation, Insurance and Property Tax	7,000.00	7,000.00	7,000.00
Balance Manufacturing Cost	34,000.00	43,000.00	50,000.00
Manufacturing Costs Paid
August	7,000.00
September	27,200.00	6,800.00
October		34,400.00	8,600.00
November			40,000.00
Total Manufacturing Costs paid	34,200.00	41,200.00	48,600.00

Working No 3
Selling & Administrative Cost Paid
	September	October	November
Selling & Administrative Cost	34,000.00	35,000.00	60,000.00
Selling & Administrative Cost Paid	34,000.00	35,000.00	60,000.00

2. Recommendation to Finance Controller : The budgets for September and October look fine. To maintain the minimum cash balance in November the company will have to sell the marketable securities to the extent of deficiency , i.e, $5,220. Alternatively, the Finance Controller can look towards following solutions to improve cashflow:

1. Increase collection from credit sales

2. Renegotiate payment terms with suppliers

3. Push capital expenditure if not of immediate urgency to next month

if company chooses to sell marketable securities, then revised cashflow will be as follows

Bridgeport Housewares Inc.
Cash Budget
For the Three Months Ending November 30
	September	October	November
Estimated Cash Receipts from
Cash Sales (Working no 1)	9,700.00	11,600.00	15,700.00
Collection of Accounts Receivable (Working No 1)	82,900.00	86,610.00	99,270.00
Proceeds from sale of markeatble securities			5,220.00
Total Cash Receipts	92,600.00	98,210.00	120,190.00
Less: Estimated Cash Payments For:
Manufacturing Costs (Working No 2)	34,200.00	41,200.00	48,600.00
Selling and Administrative Expenses (Working No 3)	34,000.00	35,000.00	60,000.00
Capital Expenditure:	-	-	38,000.00
Other Purposes:
Income Tax	-	14,000.00	-
Dividend	-	-	7,000.00
Total Cash Payments	68,200.00	90,200.00	153,600.00
Cash Increase or (decrease)	24,400.00	8,010.00	(33,410.00)
Plus Cash at the beginning of the month	37,000.00	61,400.00	69,410.00
Cash Balance at the end of the month	61,400.00	69,410.00	36,000.00
Less: Minimum Cash Balance	36,000.00	36,000.00	36,000.00
Excess or (Deficiency)	25,400.00	33,410.00	0.00