Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $60,00

Question

Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and
$60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and
$100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes
to maintain a minimum cash balance of $5,000. Given the following data, prepare
and interpret a cash budget for the months of May, June, and July.
(1) The firm makes 20% of sales for cash, 60% are collected in the next month,
and the remaining 20% are collected in the second month following sale.

(2) The firm receives other income of $2,000 per month.
(3) The firm’s actual or expected purchases, all made for cash, are $50,000,
$70,000, and $80,000 for the months of May through July, respectively.
(4) Rent is $3,000 per month.
(5) Wages and salaries are 10% of the previous month’s sales.
(6) Cash dividends of $3,000 will be paid in June.
(7) Payment of principal and interest of $4,000 is due in June.
(8) A cash purchase of equipment costing $6,000 is scheduled in July.
(9) Taxes of $6,000 are due in June.

Explanation / Answer

Statement showing cash Budget Particulars March April May June July Sales             50,000.00             60,000.00             70,000.00             80,000.00          100,000.00 Collections: Collection @20% in same month             10,000.00             12,000.00             14,000.00             16,000.00             20,000.00 Collection @60% in next month             30,000.00             36,000.00             42,000.00             48,000.00 Collection @20% in next to next month             10,000.00             12,000.00             14,000.00 Other Income per month               2,000.00               2,000.00               2,000.00               2,000.00               2,000.00 Total Collections             62,000.00             72,000.00             84,000.00 Payments: Payments             50,000.00             70,000.00             80,000.00 Rent               3,000.00               3,000.00               3,000.00 Wages @10% of prev Month sales               6,000.00               7,000.00               8,000.00 Cash Dividends               3,000.00 Payment of principal and intt               4,000.00 Cash Purchase of equipment               6,000.00 Taxes                 6,000.00 Total Payments             59,000.00             93,000.00             97,000.00 Opening Balance               5,000.00               8,000.00 Closing Balance(Op+Collections-Payments)               8,000.00          (13,000.00) June Company will have to borrow money in June to maintain its minimum cash balance Balance before borrowing          (13,000.00) Desired balance               5,000.00 Money to be borrowed(5000-(-13000))             18,000.00 July If company borrows 5000 in June then opening cash balance in July               5,000.00 Total Collections             84,000.00 Total Payments             97,000.00 Closing Balance(Op+Collections-Payments)             (8,000.00) Desired balance               5,000.00 Money to be borrowed(5000-(-8000))             13,000.00

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