Question

Cash Budget

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

	May		June		July
Sales	$126,000		$160,000		$205,000
Manufacturing costs	53,000		69,000		74,000
Selling and administrative expenses	37,000		43,000		45,000
Capital expenditures	_		_		49,000

The company expects to sell about 15% 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 September, 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 May 1 include cash of $48,000, marketable securities of $68,000, and accounts receivable of $140,300 ($110,000 from April sales and $30,300 from March sales). Sales on account for March and April were $101,000 and $110,000, respectively. Current liabilities as of May 1 include $10,500 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $19,000 will be made in June. Sonoma’s regular quarterly dividend of $7,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $37,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
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 (deficiency)	$	$	$

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

Answer 1

Solution:

Computation of Collection from Customer
Particulars	May	June	July
Collection for March Sales	$30,300.00
Collection for April Sales	$77,000.00	$33,000.00
Collection for May Sales		$74,970.00	$32,130.00
Collection for June Sales			$95,200.00
Total cash collections	$107,300.00	$107,970.00	$127,330.00
Computation of Cash payment of manufacturing costs
Particulars	May	June	July
Payment for April Manufacturing cost	$10,500.00
Payment for May Manufacturing cost	$36,800.00	$9,200.00
Payment for June Manufacturing cost		$49,600.00	$12,400.00
Payment for July Manufacturing cost			$53,600.00
Total cash disbursements	$47,300.00	$58,800.00	$66,000.00

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
Particulars	May	June	July
Estimated cash receipts from:
Cash sales	$18,900.00	$24,000.00	$30,750.00
Collection of accounts receivable	$107,300.00	$107,970.00	$127,330.00
Total cash receipts	$126,200.00	$131,970.00	$158,080.00
Less estimated cash payments for:
Manufacturing costs	$47,300.00	$58,800.00	$66,000.00
Selling and administrative expenses	$37,000.00	$43,000.00	$45,000.00
Capital expenditures			$49,000.00
Other purposes:
Income tax		$19,000.00
Dividends			$7,000.00
Total cash payments	$84,300.00	$120,800.00	$167,000.00
Cash increase or (decrease)	$41,900.00	$11,170.00	-$8,920.00
Plus cash balance at beginning of month	$48,000.00	$89,900.00	$101,070.00
Cash balance at end of month	$89,900.00	$101,070.00	$92,150.00
Less minimum cash balance	$37,000.00	$37,000.00	$37,000.00
Excess or (deficiency)	$52,900.00	$64,070.00	$55,150.00

The budget indicates that the minimum cash balance will not be maintained in July. 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.