ABC, Inc. has estimated sales and purchase requirements for the last half of the

Question

ABC, Inc. has estimated sales and purchase requirements for the last half of the coming year. Past experience indicates that it will collect 20% of its sales in the month of sale, 40% of the remainder 1 month after the sale, and the balance in the second month following the sale. Stauffer prefers to pay for half its purchases in the month of purchase and the other half the following month. Labor expense for each month is expected to equal 10% of that month’s sales, with cash payment being made in the month in which the expense is incurred. Depreciation expense is $7,000 per month, misc cash expenses are $8,500 per month and are paid in the month incurred. General and Administrative expenses of $65,000 are recognized and paid monthly. A $55,000 truck is to be purchased in August and is to be depreciated on a S/L basis over 10 years with no expected salvage value. Do not calculate additional depreciation on truck, as it is already built into the monthly amount given. The company also plans to pay $45,000 cash dividend to stockholders in July and August. The company feels the minimum cash balance of $30,000 should be maintained. Any borrowing will cost 12% annually with interest paid in the month following the month in which the need for funds arises. For example, if during the month of July the firm should need to borrow $54,000 to maintain its $30,000 desired minimum balance, the $54,000 will be taken out on July 1 with interest owed for the entire month of July. Interest for the month of July would then be paid on August 1. Sales and purchases estimates are shown below. Prepare a cash budget for the months of July, August and September. Cash on hand June 30 was $30,000, while sales for May and June were $100,000 and purchases were $50,000 for each of these months.

Month Sales Purchases

July $175,000 $70,000

August    $215,000 $90,000

September $295,000 $50,000

Explanation / Answer

Expected Cash Collections from sales for the quarter ended September 30th:

Expected cash disbursements for merchandise purchases for the quarter ended September 30th:

Cash budget for the quarter ending September 30th:

July August September Collection from $ $ $ May sales 40,000 June sales 40,000 40,000 July sales 35,000 70,000 70,000 August sales 43,000 86,000 September sales 59,000 Total cash collections 115,000 153,000 215,000

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