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 $47,000.

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

	October		November		December
Cash sales	$	83,000	$	79,000	$	85,600
Sales on account	$	500,000	$	624,000	$	674,000

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 $372,000 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 $189,500, all of which will be paid in December.

Selling and administrative expenses are budgeted at $502,000 for December. Of this amount, $69,000 is for depreciation.

A new web server for the Marketing Department costing $88,500 will be purchased for cash during December, and dividends totaling $14,500 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 Collections of Credit Sales of
October ( $ 500,000 x 18%)	90,000
November ( $ 624,000 x 60%)	374,400
December ( $ 674,000 x 20%)	134,800
Cash Sales: December	85,600
Total Cash Collections for December	$ 684,800

2. Expected Cash Disbursements for Merchandise Purchases:

Disbursements for the Purchases of
November	189,500
December	111,600
Total Cash Disbursements	301,100

3. Ashton Company

Cash Budget

For the month ended December 31

	$	$
Beginning Cash Balance		47,000
Expected Cash Collections		684,800
Total Cash Available		731,800
Less : Cash Disbursements for
Merchandise Purchases	301,100
Selling and Administrative Expenses	433,000
Purchase of Equipment	88,500
Dividends	14,500
Total Expected Cash Disbursements		837,100
Cash Surplus ( Deficit)		(105,300)
Financing		125,300
Ending Cash Balance		20,000