The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash bud

Question

The controller of Mercury 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 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainderthe following month ( second month after sale). Deprecation, insurance, and property taxs expense represent 12000 of the estimated monthly manufacturing costs. The anual 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 42000, marketable securities of 25000, and accounts recievable of 198000 (150000 from May sales and 48000 from April sales). Sales on account in April and May were 120000 and 150000, respectively. Current Liabilities as of June 1 include 13000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimate income tax payment of 24000 will be made in July.Mercury Shoes regular quarterly dividend of 15000 is expected to be declared in July and paid in August. Management desires to maintain a minimum cash balance of 40000.

1 Prepare a monthly cash budget and supporting schedules for June, July, and August 2016.

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

June July August Sales 160000 185000 200000 Manufacturing costs 66000 82000 105000 selling and administrative expenses 40000 46000 51000 Capital expenditures - - 120000

Explanation / Answer

1)

Workings

2) The cash balance at the end of the month of August is $31000, which is less than the minimum desired ending cash balance of $40000. To maintain the ending cash balance at $40000, the company has to borrow an amount of $9000.

Mercury Shoes Inc Cash Budget ($) For the three months ending 31st August, 2014 June July August Cash receipts from: Cash sales 16000 18500 20000 Collection of Accounts receivable 138000 146400 157500 Total cash receipts 154000 164900 177500 Estimated Cash payment for: Manufacturing Costs 56200 66800 88400 selling and Admin. Expenses 40000 46000 51000 Capital Expenditure 120000 Income Tax 24000 Dividends 15000 Total cash disbursements 96200 136800 274400 Excess receipt or (deficiency) over disbursements 57800 28100 -96900 Cash Balance at the beginning of the month 42000 99800 127900 Cash balance at end of month 99800 127900 31000 Minimum cash balance 40000 40000 40000 Excess / deficincy 59800 87900 -9000

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