Ok so I have done this exercise before in class, however I have a couple questions with the exercise itself.
1. In the 2nd part of the problem, if purchases on inventory total $280,000 for December, then why does the total cash disbursements total $245,000 for that month? Where does the remaining $35,000 go?
2. On the 3rd part of the problem, what exactly does it mean that $50,000 of the $430,000 for Selling and Administrative expenses is for depreciation? I know it could probably be explained in simple terms, but I’m just wondering why depreciation isn’t actually listed in the cash budget, but rather assumed instead.
THE 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:
a. The cash balance on December 1 is $40,000.
b. Actual sales for October and November and expected sales for December are as follows:
October November December
Cash sales $65,000 $70,000 $83,000
Sales on account $400,000 $525,000 $600,000
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.
c.
Purchases of inventory will total $280,000 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 $161,000, all of which will be paid in December.
d. Selling and administrative expenses are budgeted at $430,000 for December. Of this amount, $50,000 is for depreciation.
e. A new Web server for the Marketing Department costing $76,000 will be purchased for cash during December, and dividends totaling $9,000 will be paid during the month.
f. The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to bolster the cash position as needed.
Requirement 1:
Prepare a schedule of expected cash collections for December. (Omit the “$” sign in your response.)
December cash sales $
Collections on account:
October sales
November sales
December sales
Total cash collections
$
Requirement 2:
Prepare a schedule of expected cash disbursements for merchandise purchases for December. (Omit the “$” sign in your response.)
November purchases $
December purchases
Total cash payments
$
Requirement 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.
THE ANSWER
1. Schedule of expected cash collections for December:
December cash sales
$?83,000
Collections on account:
October sales($400,000*18%)
72,000
November sales($525,000*60%)
315,000
December sales($600,000*20%)
120,000
Total cash collections
$590,000
2. Schedule of expected cash disbursements:
Payments to suppliers:
November purchases
$161,000
December purchases($280,000*30%)
84,000
Total cash payments
$245,000
3.
Ashton Company
Cash Budget
For the Month of December
Cash balance, beg.
$ 40,000
Add cash receipts: Collections from customers
$590,000
Total cash available before current financing
$630,000
Less disbursements:
Payments to suppliers for inventory
$245,000
Selling and administrative expenses
$380,000
New web server
$76,000
Dividends paid
$9,000
Total disbursements
$710,000
Excess (deficiency) of cash available over Disbursements
($80,000)
Financing:
Borrowings
$100,000
Repayments
$0
Interest
$0
Total financing
$100,000
Cash balance, ending
$ 20,000