Question

Cash Budget

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

	March		April		May
Sales	$130,000		$155,000		$205,000
Manufacturing costs	55,000		67,000		74,000
Selling and administrative expenses	38,000		42,000		45,000
Capital expenditures	_		_		49,000

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 $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in July, and the annual property taxes are paid in November. 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 March 1 include cash of $49,000, marketable securities of $70,000, and accounts receivable of $145,200 ($114,000 from February sales and $31,200 from January sales). Sales on account for January and February were $104,000 and $114,000, respectively. Current liabilities as of March 1 include a $65,000, 12%, 90-day note payable due May 20 and $10,000 of accounts payable incurred in February for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $3,900 in dividends will be received in March. An estimated income tax payment of $19,000 will be made in April. Dash Shoes' regular quarterly dividend of $10,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $38,000.

Dash Shoes Inc.
Cash Budget
For the Three Months Ending May 31, 2016
	March	April	May
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 or (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess or (deficiency)	$	$	$

2. The budget indicates that the minimum cash balance   be maintained in May. 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 March and April, the cash balance will   the minimum desired balance.

Answer 1

Here, annual insurance premium will have no impact on the cash budget as we are preparing for March April and May months

Collection of accounts receivable
	Jan	Feb	March	April	May
Sales	-	-	130,000	155,000	205000
Sales on account (90%)	104,000	114,000	117000	139500	184500
Collection
70% in following month		72800	79800	81900	97650
30% in second month following sale	31200	34200	35100
Total collection			111000	116100	132750

Payments for manufacturing costs
	Costs on account	Percentage	Payments
Paid in March
incurred in Feb	0		0
incurred in March	55000	80%	44000
Paid in April
incurred in March	55000	20%	11000
incurred in April	67000	80%	53600
Paid in May
incurred in April	67000	20%	13400
incurred in May	74000	80%	59200
Total			181200

	March	April	May
Estimated cash receipts from
Cash sales at 10%	13000	15500	20500
Collection of accounts receivables	111000	116100	132750
Total cash receipts	124000	131600	153250
Less: estimated cash payments for
Manufacturing costs	44000	64600	72600
Selling and administrative expenses	38000	42000	45000
Capital expenditures			49000
Other purposes:
Income tax		19000
Dividends			10000
Total cash payments	82000	125600	176600
Cash Increase or (decrease)	42000	6000	-23350
Cash balance at the beginningof month	49000	91000	97000
Cash balance at the end of month	91000	97000	73650
Less: minimum cash balance	38000	38000	38000
Excess or (deficiency)	53000	59000	35650

The budget indicates that the minimum cash balance will be maintained in May. This situation can be corrected by borrowing or by the Sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceeds the minimum desired balance.