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.

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 December

Cash sales in Dec. = 89,200

Credit sales collection of Dec [638000 * 0.2] = 127600

Credit sales collection of Nov. [503000 * 0.6] = 301800

Credit sales collection of Oct. [470000 * 0.18] = 84600

   Total cash collections    = $603200

2. expected cash disbursements for merchandise purchases for December

Nov. months accounts payable =$163,000

Dec. inventory payment [338000*0.3] = 101400

Total cash disbursement = 264400

3. cash budget for December

Cash Balance on December 1 = $51,800

Add:  Total cash collections = $603200

Total cash available = $655000

less: cash disbursements :

payment to suppliers 264400

Selling and administrative expenses

[$434,000-80400] 353600

new web server $98,000

dividends $16,000 = 732000

Excess or (deficiency) of cash available over disbursement = (77000)

Financing:

Borrowings = 97000

Repayment = 0

Interest =    0   

Ending cash balance = $20000