The Company has budgeted sales revenues as follows: July August September Credit
ID: 2365382 • Letter: T
Question
The Company has budgeted sales revenues as follows:July August September
Credit sales $30,000 $24,000 $18,000
Cash sales 18,000 51,000 39,000
Total sales $48,000 $75,000 $57,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month.
Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are $65,000 in July, $45,000 in August, and $21,000 in September.
Other budgeted cash receipts: (a) sale of plant assets for $12,350 in August, and (b) sale of new common stock for $16,850 in September. Other budgeted cash disbursements: (a) operating expenses of $6,750 each month, (b) selling and administrative expenses of $12,500 each month, (c) dividends of $19,000 will be paid in August, and (d) purchase of equipment for $6,000 cash in September.
The company has a cash balance of $10,000 at the beginning of August and wishes to maintain a minimum cash balance of $10,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of August 1.
Requirements:
1. Use this information to prepare a Cash Budget for the months of August and September, using the template provided in Doc Sharing.
https://docs.google.com/spreadsheet/ccc?key=0AkvIif37LHQ2dG1qZUdmSHlMUm1DSERvcFd5eUNvYkE&hl=en_US#gid=0
Explanation / Answer
(b)
A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems.
For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.
For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.
a) The three sections of cash budget are
The Cash receipts section includes expected receipts from the company’s principal source(s) of cash, such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets ,etc.
The cash payment section includes the payment made for operating activities like selling and distributive expenses, administrative expenses. It also inlcude payment made for purchase of equipments, assets, payment to creditors, etc.
The financing section deals the borrowings and repayments projected to take place during the budget period. It also include interest payments that will be due on money borrowed. Generally speaking, the cash budget should be broken down into time periods that are as short as feasible. Considerable fluctuations in cash balances may be hidden by looking at a longer time period. While a monthly cash budget is most common, many firms budget cash on a weekly or even daily basis.
(c)
Many companies struggle, not because they fail to generate sales, but because they cannot manage their cash. Managing the often-precarious balance created by the ebb and flow of cash during the operating cycle is one of a company’s greatest challenges.
5. Invest idle cash
July August September Opening balance 10,000 10,000 Received from sales: Cash sales 18,000 51,000 39,000 Collection from credit sales =30000*60% = 24000 *60% = 18000*60% month of credit sale 18000 14400 10800 next month of credit sale =30000*40% = 24000 *40% 12000 9600 Total received from sales 36,000 77,400 59,400 Cash receipts: Sale of plant assets 12350 Sale of new common stock 16850 Expenses: Inventory - month of purchase 32500 22500 10500 month following purchase 32500 22500 Opertaing expenses 6750 6750 6750 Selling and administrative exp 12500 12500 12500 Dividend 19000 Purchase of equipment 6000 Add: Loan from bank 3500 Less: repayment of loan 3500 Less: Interest paid (3500*12%*2/12) 70 Closing balance 10,000 24,430(b)
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