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 $41,600.
b.	Actual sales for October and November and expected sales for December are as follows:

	October		November		December
Cash sales	$	81,200	$	72,000	$	96,200
Sales on account		495,000		512,000		684,000

   

	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 $285,000 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 $185,000, all of which will be paid in December.
d.	Selling and administrative expenses are budgeted at $455,000 for December. Of this amount, $89,600 is for depreciation.
e.	A new web server for the Marketing Department costing $79,000 will be purchased for cash during December, and dividends totaling $10,000 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 bolster the cash position as needed.

Required:
1.	Prepare a schedule of expected cash collections for December.

  

  

2.	Prepare a schedule of 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) Schedule of Expected Cash Collections for December (Amounts in $)

Cash Sales	96,200
Collection for the month of:
December (20% of credit sales i.e. $684,000)	136,800
November (60% of Credit sales i.e. $512,000)	307,200
October (18% of Credit sales i.e. $495,000)	89,100
Total Cash Collections	629,300

2) Schedule of Expected Cash Disbursements for Purchases (Amts in $)

Cash disbursements for the month of:
December ($285,000*30%)	85,500
November	185,000
Total Cash Disbursements	270,500

3) Cash Budget for December (Amounts in $)

Cash Balance, Dec. 1	41,600
Add: Total Cash Receipts	629,300
Total Cash Available (A)	670,900
Cash Disbursements:
Payment for merchandise purchases	270,500
Selling and Administrative Expenses ($455,000-$89,600)	365,400
Web Server Purchased	79,000
Dividends paid	10,000
Total Cash disbursements (B)	724,900
Net increase/(decrease) in cash (C = A-B)	(54,000)
Financing:
Borrowings	74,000
Repayments	0
Total Financing (D)	74,000
Cash Balance, Dec 31 (C+D)	20,000

Total borrowing needed will be equal to sum of cash needed to maintain minimum balance of $20,000 and cash needed to cover the decrease in cash of $54,000.

Thus total borrowing needed = Minimum Cash + Decrease in Cash

= $20,000+$54,000 = $74,000