You have been asked to prepare a December cash budget for Ashton Company, a dist

Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations:

The cash balance on December 1 is $51,800.

Actual sales for October and November and expected sales for December are as follows:

- Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

- Purchases of inventory will total $338,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $163,000, all of which will be paid in December.

- Selling and administrative expenses are budgeted at $434,000 for December. Of this amount, $80,400 is for depreciation.

- A new web server for the Marketing Department costing $98,000 will be purchased for cash during December, and dividends totaling $16,000 will be paid during the month.

- The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed.

Required:

1. Calculate the expected cash collections for December.

2. Calculate the expected cash disbursements for merchandise purchases for December.

3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

October November December Cash sales $ 80,000 $ 82,000 $ 89,200 Sales on account $ 470,000 $ 503,000 $ 638,000

Explanation / Answer

EXPECTED CASH COLLECTIONS DEC cash sales 89200 Oct month sale 84,600 Nov month sale 301,800 Dec month sale 127600 Total Cash Collections 603,200 EXPECTED CASH PAYMENTS Dec Beginning Accounts payable 163,000 Dec month Purchase 101400 Total Cash disbursement 264,400 CASH BUDGET for the month ending Dec DEC Beginning Cash balance 51800 Add: Cash collections from customers 603200 Total Cash available 655000 Less: Expected disbursement Payment to suppliers 264400 Selling and admin expense 353600 (434000-80400) Web server equipment purchased 98000 Dividend paid 16000 Total disbursement 732000 Shortage of cash balance -77000 Financing: Borrowing 97000 Repayment 0 Interest paid 0 Total financing 97000 Ending balance of cash 20,000

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