P4-9 Cash budget: Basic Grenoble Enterprises had sales of $50,000 in March and $

Question

P4-9 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.

Explanation / Answer

Notes : cash collected for sales May June July Forecasted Sales 70000 80000 100000 Cash collected - Sales current month - 20% 14000 16000 20000    previous month - 60% 36000 42000 48000    second month - 20% 10000 12000 14000 Cash collected 60000 70000 82000 May June July previous month 60000 * 60% 70000*60% 80000*60% second month 50000*20% 60000*20% 70000*20% Wages and Salaries - 10% of previous month sale 6000 7000 8000 Cash Budget of Basic Grenoble Enterprises May June July Opening Balance ( A) 5000 8000 0 Add :       Cash from Sales ( refer note ) 60000 70000 82000        Otber Income Receipts 2000 2000 2000 Total Cash Receipts (B) 62000 72000 84000 Less :         Cash Purchases 50000 70000 80000          Wages and Salaries ( Refer note) 6000 7000 8000          Rent 3000 3000 3000           Cash Dividend 3000          Principle and Interest 4000          Equipment purchase 6000          Taxes paid 6000 Total Cash Disbursement ( C) 59000 93000 97000 Closing Balance ( A + B -C ) 8000 -13000 As the minimum cash balance to be mantained is 5000 , and there is a negative balance of 13000 in June, the company will reuire to borrow $ 18000 in June to have a minimum balance of $ 5000 in June ( 13000 + 5000) Hence revised cash budget will be as follows : Cash Budget of Basic Grenoble Enterprises May June July Opening Balance ( A) 5000 8000 5000 Add :       Cash from Sales ( refer note ) 60000 70000 82000        Otber Income Receipts 2000 2000 2000         Loan taken 18000 Total Cash Receipts (B) 62000 90000 84000 Less :         Cash Purchases 50000 70000 80000          Wages and Salaries ( Refer note) 6000 7000 8000          Rent 3000 3000 3000           Cash Dividend 3000          Principle and Interest 4000          Equipment purchase 6000          Taxes paid 6000 Total Cash Disbursement ( C) 59000 93000 97000 Closing Balance ( A + B -C ) 8000 5000 -8000 Again , it is seen that July has a negative balance of 8000 , which means that the company will again have to borrow 13000 ( 8000 + 5000) to maintain a minimum balance of 5000 Hence final cash budget is as follows Cash Budget of Basic Grenoble Enterprises May June July Opening Balance ( A) 5000 8000 5000 Add :       Cash from Sales ( refer note ) 60000 70000 82000        Otber Income Receipts 2000 2000 2000         Loan taken 18000 13000 Total Cash Receipts (B) 62000 90000 97000 Less :         Cash Purchases 50000 70000 80000          Wages and Salaries ( Refer note) 6000 7000 8000          Rent 3000 3000 3000           Cash Dividend 3000          Principle and Interest 4000          Equipment purchase 6000          Taxes paid 6000 Total Cash Disbursement ( C) 59000 93000 97000 Closing Balance ( A + B -C ) 8000 5000 5000

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