Question

The controller of Trenshaw Company wants to improve the company’s control system by preparing a month-by-month cash budget. The following information is for the month ending July 31, 2020.

Prepare cash budget for a month.

June 30, 2020, cash balance	$45,000
Dividends to be declared on July 15*	12,000
Cash expenditures to be paid in July for operating expenses	40,800
Amortization expense in July	4,500
Cash collections to be received in July	90,000
Merchandise purchases to be paid in cash in July	56,200
Equipment to be purchased for cash in July	20,000
*Dividends are payable 30 days after declaration to shareholders of record on the declaration date.

Trenshaw Company wants to keep a minimum cash balance of $25,000.

Instructions

a. Prepare a cash budget for the month ended July 31, 2020, and indicate how much money, if any, Trenshaw Company will need to borrow to meet its minimum cash requirement.

b. Explain how cash budgeting can reduce the cost of short-term borrowing.

(CGA adapted)

Answer 1

a.)	Cash Balance , June 30 2020	45,000
	Add: Cash collection to be received in july	90,000
	Total Cash Available	135,000
	Less: Cash Disbursements
	Cash expenditures to be paid in July for operating expenses	40,800
	Merchandise purchases to be paid in cash in July	56,200
	Equipment to be purchased for cash in July	20,000
	Total Cash Disbursement	117,000
	Cash left after disbursement	18,000
	Add: Borrowings	7,000	=25000-18000
	Ending Cash Balance	$ 25,000
	Trenshaw Company will need to borrow $ 7,000 to meet its minimum cash requirement.

b.) The benefit of cash budgeting is that it will allow cash deficit to be predicted in advance. If the timing of future cash shortfalls is known, arrangements to borrow funds can be made well in advance, which often means that interest rates may be more favourable than if the funds are needed on short notice.The company can take steps to expedite collections thereby minimizing the need to borrow & resulting in interest cost being the cost of short term borrowings.