Question

James International is in the construction business. In 2010, it is expected that 30 percent of a month's sales will be received in cash, with the balance being received the following month. Of the purchases, 50 percent are paid the following month, 40 percent are paid in two months, and the remaining 10 percent are paid during the month of purchase.

The sales force receives $1,500 a month base pay plus a 4 percent commission. Labor expenses are expected to be $4,000 a month. Other operating expenses are expected to run about $4,500 a month, including $500 for depreciation. The ending cash balance for 2009 was $18,000.

	Sales	Purchases
2009—Actual
November	$100,000	$60,000
December	150,000	70,000
2010—Budgeted
January	50,000	80,000
February	80,000	60,000
March	60,000	70,000

a. Prepare a cash budget and determine the projected ending cash balances for the first three months of 2010.
b. Determine the months that the company would either borrow or invest cash.

Answer 1

Ans- Schedule of expected cash collections:-

	November	December	January	February	March
Sales	$100,000	$150,000	$50,000	$80,000	$60,000
30% in the same month	30,000 (100,000*30%)	45,000	15,000	24,000	18,000
70% in the following month		70,000 (100,000*70%)	105,000	35,000	56,000
Total cash collection	30,000	115,000	120,000	59,000	74,000

Schedule of expected cash disbursements:-

	November	December	January	February	March
Purchases	$60,000	$70,000	$80,000	$60,000	$70,000
10 % in the same month	$6,000 (60,000*10%)	7,000	8,000	6,000	7,000
50% in the following month		30,000 (60,000*50%)	35,000 (70,000*50%)	40,000 (80,000*50%)	30,000 (60,000*50%)
40 % in two months			24,000 (60,000*40%)	28,000 (70,000*40%)	32,000 (80,000*40%)
Total cash disbursements	6,000	37,000	67,000	74,000	69,000

Cash Budget for first three months of 2010:-

	January	February	March
Opening Balance	$18,000	59,500	$31,800
Cash Collection	120,000	59,000	74,000
Total Cash Available for use	$138,000	$118,500	$105,800
Payments:-
Cash Disbursements	67,000	74,000	69,000
Selling Expenses	1,500	1,500	1,500
Sales commission 4% of sales	2,000 (50,000*4%)	3,200 (80,000*4%)	2,400 (60,000*4%)
Labor expenses	4,000	4,000	4,000
Other Operating expenses (4,500-500)	4,000	4,000	4,000
Total Cash Payments	$78,500	$86,700	$80,900
Cash Surplus/ (Deficit) (Available at the end )	$59,500	$31,800	$24,900

The company would invest cash in all three months (January, February and March) because all three months have positive cash balance.