The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget
ID: 2373591 • Letter: T
Question
The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:
The company expects to sell about 12% of its merchandise for cash. Of sales on account, 70% 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 $7,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in July, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 85% are expected to be paid in the month in which they are incurred and the balance in the following month.
Current assets as of March 1 include cash of $36,000, marketable securities of $51,000, and accounts receivable of $104,500 ($82,000 from February sales and $22,500 from January sales). Sales on account for January and February were $75,000 and $82,000, respectively. Current liabilities as of March 1 include a $47,000, 12%, 90-day note payable due May 20 and $7,000 of accounts payable incurred in February for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $2,800 in dividends will be received in March. An estimated income tax payment of $13,000 will be made in April. Dash Shoes' regular quarterly dividend of $7,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $28,000.
1. Prepare a monthly cash budget and supporting schedules for March, April, and May. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. Assume 360 days per year for interest calculations.
March April May
Estimated cash from:
Cash Sales
Collection of accounts receivable
Dividends
Total cash receipts
Estimated Cash payment for:
Manufacturing costs
selling and administrative expenses
Other purposes:
Note payable (including interest)
Income tax
dividends
Total cash payments
Cash increae or (decrease)
Cash balance at beginning of month
Minimum cash balance
Excess or (deficiency)
Explanation / Answer
Definition of 'Cash Budget' An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. ............................................................................................................................................................................... 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.
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