Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations: a.The cash balance on December 1 is $47,600. b.Actual sales for October and November and expected sales for December are as follows: October November December Cash sales $ 78,800 $ 74,400 $ 89,600 Sales on account $ 405,000 $ 615,000 $ 628,000 Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. c.Purchases of inventory will total $351,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $194,500, all of which will be paid in December. d.Selling and administrative expenses are budgeted at $512,000 for December. Of this amount, $81,400 is for depreciation. e.A new web server for the Marketing Department costing $104,000 will be purchased for cash during December, and dividends totaling $11,500 will be paid during the month. f.The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed. Required: 1. Calculate the expected cash collections for December. 2. Calculate the expected cash disbursements for merchandise purchases for December. 3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

1	Expected Cash collections for the month of December
	Particulars	December ($)
	Cash Sales	89,600
	Cash received in december against credit sales	567,500
	(Refer working I below)
	Expected Cash collections for December	657,100
	Working I
	Particulars	October ($)	November ($)	December ($)
	Credit Sales	405,000	615,000	628,000
	20% received in same month	81,000	123,000	125,600
		(405000*20%)	(615000*20%)	(628000*20%)
	60% received in next month	-	243,000	369,000
			(405000*60%)	(615000*60%)
	18% received in the second month following the sale	-	-	72,900
				(405000*18%)
	Total cash received in December against credit Sales
	(125600+369000+72900)			567,500
2	Expected Cash Disbursements for merchandise purchase the month of December
	Particulars			December ($)
	30% amount paid for the Inventory purchased in December			105,300
	($351000*30%)
	Cash paid in December for the Accounts payable for November inventory purchases			194,500
	(Refer working I below)
	Expected cash Disbursements for merchandise purchase for the month of December			299,800
	($105300+194500)
3	Cash Budget for the month of December
	Particulars			Amount($)
	Cash Sales			89,600
	Credit Sales			567,500
	Total Receipts (a)			657,100
	Purchases			299,800
	Selling and Adminitrative expenses excluding depreciation as depreciation is not a cash expense			430,600
	(512000-81400)
	Dividends Paid			11,500
	Total Expenditure   (b)			442,100
	(430600+11500)
	Net Receipts (a-b)			215,000
	(657100-442100)
	Cash Balance at the start			47,600
	Cash Balance at end (215000+47600)			262,600
	As the cash balance is more than the minimum balance required to be maintained i.e. $ 20,000, no borrowing would be needed