The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for t

Question

The controller of Shoe Mart Inc. asks you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

January February March

Sales $550,000 $570,000 $660,000

Manufacturing costs 260,000 330,000 420,000

Selling and administrative expenses 100,000 140,000 150,000

Capital expenditures -- -- 45,000

The company expects to sell about 20% of its merchandise for cash. Of sales on account, 75% 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 $40,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in June, and the annual property taxes are paid in October. Of the remainder of the manufacturing costs, 90% are expected to be paid in the month in which they are incurred and the balance is the following month. All sales and administrative expenses are paid in the month incurred.

Current assets as of January 1 include cash of $45,000, marketable securities of $65,000, and accounts receivable of $290,000 ($240,000 from December sales and $50,000 from November sales). Sales on account in November and December were $200,000 and $240,000, respectively. Current liabilities as of January 1 include a $50,000, 8%, 90-day note payable due March 20 and $18,000 of accounts payable incurred in December for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $20,000 in dividends will be received in January. An estimated income tax payment of $15,000 will be made in February. Shoe Mart’s regular quarterly dividend of $5,000 is expected to be declared in February and paid in March. Management desires to maintain a minimum cash balance of $35,000.

Instructions

1. Prepare a monthly cash budget and supporting schedules for January, February, and March.

2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

So my school doesn't have tutors for this, I can't afford a traditional tutor, and am having a horrible time with accounting. I've done some of this, based on a template from a similar question that I found here on Chegg. However, I've definitely made some mistakes regarding some of the numbers that I've entered, and don't know what I'm doing anyway, so will post what I have. Of course, it's possible that the template itself isn't exactly correct. Anyway, hopefully one of you will take the time to do this.

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January February March Sales 550,000 570,000 660,000 Manufacturing costs 260,000 330,000 420,000 Selling and administrative expenses 100,000 140,000 150,000 Capital expenditures 45,000 Sales April 200,000 May 240,000 Cash budget January February March Cash sales $550,000 $570,000 $660,000 Collections from account receivable 230,000 $472,500 $565,000 Dividends 20,000 Total cash receipts 800,000 1,042,500 1,225,000 Estimated cash payments Manufacturing costs -260,000 -330,000 -420,000 Selling and administrative expenses -100,000 -140,000 -150,000 Capital expenditure -45,000 Note payable including interest -51,000 Income tax -15,000 Dividend -5000 Total cash payments -360,000 -485,000 -671,000 Cash increase (decrease) x x x Cash balance beginning x x x Cash balance end x x x Minimum cash balance x x x Excess (deficiency) x x x Current assets 1-Jun Cash x Marketable securities x Accounts receivable x x Dec sales x Nov sales x Current liabilities Notes payable x Accounts payable x Incurred in Dec x Selling and administrative expenses paid in the month incurred Dividend received in Jan 20,000 Tax payment in Feb 15,000 Dividend payment in Feb 5000 Minimum cash balance x Collections January February March Nov sales 50,000 Dec sales 180,000 x Jan sales x x x Feb sales x x March sales x Total collections x x x Cash collections x x x Cash from receivables x x x Manufacturing costs 260,000 330,000 420,000 Depreciation, property tax and ins 40,000 40,000 40,000 Net manufacturing costs 220,000 290,000 380,000 Dec costs x Jan costs x x Feb costs x x Mar costs x Total manufacturing payments x x

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Explanation / Answer

we have to first prepare schedules of Sales , manufacturing costs to determine the cash budget .

we will prepare the sales schedule to determine the cash inflow or receipts on monthly basis given in the problem

1) 20% of sales amount is received in the first month of sales made

2) balance 80 % is on account i.e on credit basis on which 75 % of amount is received on 2nd month of sales and balance 25% received on 3rd month of sale .

The schedule of Sales is prepared to determine cash receipts the working is as under

2) We will prepare the Manufacturing cost schedule , the following points are to be considered for manufacturing costs

i) The amount of $40,000 is on account of depreciation , insurance and property tax which is to be deducted from total manufacturing cost as it is not paid in Jan to March Cash budget

ii) The balance manufacturing cost is paid in the first month is 90% and balance 10% on 2nd month . The working is given below

3 ) The selling and distribution expense is paid on the first month of expense incurred

On the the basis of above the cash budget for Jan to March is prepared as under

The working for total amount amount including interest for $50,000 ,8% 90 days note is as below

interest calculation = 50,000 x 8 % x 90 /365

= 986

Total amount payable is $ 50,000 + $ 986 = $ 50,986

2 ) The recommendation to controller is on the basis of closing Cash balance available as per above cash budget on monthly basis is more than $ 35,000 is to deposit on marketable securities on which interest will be received to the company . the maximum amount that can be invested on monthly basis will be as calculated below

January - $ 89,000 - $ 35,000 =$ 54,000

Feb = $ 1,01,000 - $ 72,986 = $28,014 (Keep $35,000 as opening balance in Feb and keep $72,986 as closing cash balance in Feb and opening balance in march then March cash closing balance would be $35,000

Schedule of Sales of Shoe mart inc November December January February March April May Total Sales 550000 570000 660000 Sales on account 200000 240000 Cash inflow Nov - sale 150000 50000 200000 Dec - sale 180000 60000 240000 Jan-sale 110000 330000 110000 550000 feb-sale 114000 342000 114000 570000 March-sale 132000 396000 132000 660000 Total - cash inflow on sales 150000 340000 504000 584000 510000 132000 2220000

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