Question

Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows:

The company’s beginning cash balance for the upcoming fiscal year will be $20,000. The company requires a minimum cash balance of $10,000 and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.

Required:

Prepare the company’s cash budget for the upcoming fiscal year

Answer 1

Concepts and reason

Budgets: A budget is a written plan for a defined activity to be executed by the entity which is expressed in quantitative terms. A budget often serves as a road map to approach the expenditure and the other financing activities of a business. It directs the funds of an organization to be used in a most appropriate and planned manner so as to achieve the targets.

However, budget does not always serve as fool proof tool to achieve the required targets as they are based on estimates. It cannot eliminate the need of necessary personnel to execute the operations so as to achieve the target.

An entity prepares different types of budgets which include:

• Sales Budget

• Cash budget

• Expenditure budget

• Receivables budget

• Production budget etc.

Fundamentals

Cash Budget: Cash budget is prepared to know the estimated cash balance that would be available with the organization at the end of (or during) a certain period. It includes all the estimated expenses, receipts along with the repayment of loans, new loans etc. A cash budget helps in knowing the minimum balance that a business is required to maintain for that period which in turn helps in avoiding any unnecessary expenditure. Further, a cash budget also helps in knowing in advance, an estimated amount that an entity would be required to borrow so as to maintain the desired cash balance.

The beginning balance with which the cash budget is prepared is more or less based on the cash balance as per the last drawn financial statement. Therefore, the cash budget would be prepared on the basis of the opening balance available for the upcoming fiscal year; that is $20,000.

Further, the company needs to maintain a cash balance of $ 10,000 at the end of every quarter; this means that the company would borrow only that much amount so as to have $10,000 as balance in case the company’s net cash balance goes negative.

Prepare cash budget for the upcoming fiscal year as provided below:

Working Note:

1. Calculation of interest on the borrowings

Thus, the expected ending cash balance at the end of the fiscal year would be $15,800.

Ans:

The expected ending cash balance at the end of the fiscal year would be $15,800.