Problem 22-4B Cash Budget The company expects to sell about 10% of its merchandi

Question

Problem 22-4B
Cash Budget

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $10,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in February, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month.

Current assets as of June 1 include cash of $48,000, marketable securities of $65,000, and accounts receivable of $168,000 ($124,000 from May sales and $44,000 from April sales). Sales on account in April and May were $110,000 and $124,000, respectively. Current liabilities as of June 1 include a $65,000, 8%, 90-day note payable due August 20 and $8,000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $4,000 in dividends will be received in June. An estimated income tax payment of $18,000 will be made in July. Fleet Shoes' regular quarterly dividend of $8,000 is expected to be declared in July and paid in August. Management desires to maintain a minimum cash balance of $45,000.

Explanation / Answer

Cash budget is a detailed plan showing how cash resources will be acquired and used over some specific time period. Cash budget is composed of four major sections. The receipts section. The disbursements section The cash excess or deficiency section The financing section The cash receipts section consists of a listing of all of the cash inflows, except for financing, expected during the budgeting period. Generally, the major source of receipts will be from sales. The disbursement section consists of all cash payment that are planned for the budgeted period. These payments will include raw materials purchases, direct labor payments, manufacturing overhead costs, and so on as contained in their respective budgets. In addition, other cash disbursements such as equipment purchase, dividends, and other cash withdrawals by owners are listed. The cash excess or deficiency section is computed as follows: Cash balance beginning Add receipts Total cash available Less disbursements Excess (deficiency) of cash available over disbursements XXXX XXXX -------- XXXX XXXX -------- XXXX If there is a cash deficiency during any period, the company will need to borrow funds. If there is cash excess during any budgeted period, funds borrowed in previous periods can be repaid or the excess funds can be invested. 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. Example of Cash Budget: (See explanation of this budget) Hampton Freeze Inc. Cash Budget For the Year Ended December 31, 2009 Quarter Other budget ref. 1 2 3 4 Year Cash balance, beginning $42,500 $40,000 $40,000 40,500 42,500 Add receipts: Collections from customers See sales budget 230,000 480,000 740,000 520,000 1,970,000 ------------ ------------ ------------ ------------ ------------ Total cash available 272,500 520,000 780,000 560,500 2,012,500 ------------ ------------ ------------ ------------ ------------ Less disbursements: Direct materials material budget 49,500 72,300 100,050 79,350 301,200 Direct labor Labor budget 84,000 192,000 216,000 114,000 606,000 Manufacturing overhead Overhead budget 68,000 96,800 103,200 76,000 344,000 Selling and Administrative sell. & adm. budget 93,000 130,900 184,750 129,150 537,800 Equipment purchases 50,000 40,000 20,000 20,000 130,000 Dividends 8,000 8,000 8,000 8,000 32,000 ------------ ------------ ------------ ------------ ------------ Total disbursements 352,500 540,000 632,000 426,500 1,951,000 ------------ ------------ ------------ ------------ ------------ Excess/deficiency of cash available over disbursements (80,000) (20,000) 148,000 134,000 61,500 Financing: Borrowings (at beginning)* 120,000 60,000 - - 180,000 Payments (at beginning) - - (100,000) (80,000) (180,000) Interest** - - (7,500) (65,00) (14,000) ------------ ------------ ------------ ------------ ------------ Total financing 1200,000 (60,000) (107,500) (86,500) (14,000) ------------ ------------ ------------ ------------ ------------ Cash balance, ending $40,000 $40,000 $40,500 $47,500 $47,500 ====== ====== ====== ====== ====== *The company requires a minimum cash balance of $40,000. Therefore, borrowing must be sufficient to cover the cash deficiencies of $80,000 in quarter 1 and to provide for the minimum cash balance of $40,000. All borrowings and repayments of principal are in round $1,000 amount. **The interest payment relate only to the the principle being repaid at the time it is repaid. For example, the interest in quarter 3 relates only to the interest due on the $100,000 principle being repaid from quarter 1 borrowing: $100,000

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