Cash budget—part 1 PrimeTime Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management’s most optimistic projections. Sales are made on account and collected as follows: 60% in the month after the sale is made and 35% in the second month after sale. Merchandise purchases and operating expenses are paid as follows:
|
In the month during which the merchandise |
|
|
is purchased or the cost is incurred |
70% |
|
In the subsequent month |
30% |
PrimeTime Sportswear’s income statement budget for each of the next four months, newly revised to reflect the success of the firm, follows:
|
July |
August |
September |
October |
|
|
Sales |
$84,000 |
$108,000 |
$136,000 |
$118,000 |
|
Cost of goods sold: |
||||
|
Beginning inventory |
$12,000 |
$28,800 |
$41,200 |
$43,800 |
|
Purchases |
75,600 |
88,000 |
97,800 |
66,200 |
|
Cost of goods available for sale |
$87,600 |
$116,800 |
$139,000 |
$110,000 |
|
Less: Ending inventory |
28,800 |
41,200 |
43,800 |
40,000 |
|
Cost of goods sold |
$58,800 |
$75,600 |
$95,200 |
$70,000 |
|
Gross profit |
$25,200 |
$32,400 |
$40,800 |
$48,000 |
|
Operating expenses |
21,000 |
25,600 |
28,600 |
32,200 |
|
Operating income |
$4,200 |
$6,800 |
$12,200 |
$15,800 |
Cash on hand June 30 is estimated to be $75,000. Collections of June 30 accounts receivable were estimated to be $40,000 in July and $30,000 in August. Payments of June 30 accounts payable and accrued expenses in July were estimated to be $48,000.
Required:
a. Prepare a cash budget for July.
b. What is your advice to management of PrimeTime Sportswear?