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:

The cash balance on December 1 is $51,800.

Actual sales for October and November and expected sales for December are as follows:

	October		November		December
Cash sales	$	80,000	$	82,000	$	89,200
Sales on account	$	470,000	$	503,000	$	638,000

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.

Purchases of inventory will total $338,000 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 $163,000, all of which will be paid in December.

Selling and administrative expenses are budgeted at $434,000 for December. Of this amount, $80,400 is for depreciation.

A new web server for the Marketing Department costing $98,000 will be purchased for cash during December, and dividends totaling $16,000 will be paid during the month.

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.

	Total cash collections Total cash disbursements

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.

Ashton Company Cash Budget For the Month of December Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Payments to suppliers for inventory Selling and administrative expenses New web server Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance

Answer 1

1. Expected Cash Collections for December:

Cash Sales	$ 89,200
Collection of October Credit Sales	84,600
Collection of November Credit Sales	301,800
Collection December Credit Sales	127,600
Total Cash Collections	$ 603,200

2. Expected Cash Disbursements for Merchandise Purchases:

Disbursement for November Purchases	$ 163,000
Disbursements for December Purchases	101,400
Total Cash Disbursements	$ 264,400

3. Ashton Company

Cash Budget

For the month of December

Beginning Cash Balance		$ 51,800
Add: Collection from Customers		603,200
Total Cash Available		655,000
Less Cash Disbursements
Payments to Suppliers for Inventory	264,400
Selling and Administrative Expenses	353,600
New Web Server	98,000
Dividends Paid	16,000
Total Cash Disbursements		732,000
Excess ( Deficiency) of cash		(77,000)
Financing:
Borrowings	97,000
Repayment	0
Interest	0
Total Financing		97,000
Ending Cash Balance		20,000