The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash
ID: 2739961 • Letter: T
Question
The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:
May June July
Sales…………………………………………… $86,000 $90,000 $95,000
Manufacturing costs…………………………………….. $34,000 $39,000 $44,000
Selling and administrative expenses…………………….. $15,000 $16,000 $22,000
Capital expenditures…………………………………….. $80,000
The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the reminder the following month (second month following sale). Depreciation, insurance and property tax expense represent $3,500 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. Of the reminder 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 May 1 include cash of $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $14,000 will be made in June. Sonoma’s regular quarterly dividend of $5,000 is expected to be declared in July. Management desires to maintain a minimum cash balance of $30,000.
Instructions
Prepare a monthly cash budget and supporting schedules for May, June, and July 2014,
On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?
Explanation / Answer
Company should invest in Marketable securities in May & June when the cash balance is more than $ 30,000
Work- Sheet
Sonoma Housewares Inc. Cash Budget Receipts May June July Opening Balance $ 33,000 $ 64,600 $ 84,880 Cash Sales $ 8,600 $ 9,000 $ 9,500 Credit Sales/Debtors $ 68,400 $ 75,780 $ 79,920 Sale of Marketable Securities $ 2,200 Total (A) $ 110,000 $ 149,380 $ 176,500 Payments Manufacturing Cost $ 30,400 $ 34,500 $ 39,500 Selling and administrative expenses $ 15,000 $ 16,000 $ 22,000 Capital Expenditure $ 80,000 Income Tax $ 14,000 Quarterly dividend $ 5,000 Total (B) $ 45,400 $ 64,500 $ 146,500 Net monthly cash gain(A-B) $ 64,600 $ 84,880 $ 30,000Company should invest in Marketable securities in May & June when the cash balance is more than $ 30,000
Work- Sheet
March April May June July 1) Sales $ 86,000 $ 90,000 $ 95,000 Cash Sales @10% $ 8,600 $ 9,000 $ 9,500 Sales on account $ 60,000 $ 72,000 $ 77,400 $ 81,000 $ 85,500 During first month afert Sale (70%) $ 50,400 $ 54,180 $ 56,700 During Second month after sale (30%) $ 18,000 $ 21,600 $ 23,220 Total on account Sales $ 68,400 $ 75,780 $ 79,920 2) March April May June July Manufacturing Cost $ 34,000 $ 39,000 $ 44,000 Less: Depreciation, Insurance and Property Tax $ 3,500 $ 3,500 $ 3,500 $ 30,500 $ 35,500 $ 40,500 80% Current Month $ 24,400 $ 28,400 $ 32,400 20% next Month $ 6,000 $ 6,100 $ 7,100 Manufacturing cost $ 30,400 $ 34,500 $ 39,500 3) It is assumed that in order to maintain minimum balance of $ 30000, the company has sold only $ 2200 of marketable securitiesRelated Questions
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