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2010 CMA Part 1

Section A Budgeting
Alpha-Tech
Estimated time 30 minutes
Alpha-Tech, a rapidly growing distributor of electronic components, is formulating its plans for 2012.
Carol Jones, the firm's marketing director, has completed the sales forecast presented below.
Alpha-Tech
2012 Forecasted Sales
(in thousands)
Month

Sales

January

$9,000

July

February

10,000

August

15,000

September

16,000

March

9,000

Month

Sales
$15,000

April

11,500

October

16,000

May

12,500

November

15,000

June

14,000

December

17,000

Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing
the cash flow projection. The following information will be used in preparing the cash flow projection.

Alpha-Tech's excellent record in accounts receivable collection is expected to continue. Sixty


percent of billings are collected the month after the sale and the remaining 40 percent two
months after.

The purchase of electronic components is Alpha-Tech's largest expenditure and is estimated to be


40 percent of sales. Seventy percent of the parts are received by Alpha-Tech one month prior to
sale and 30 percent are received during the month of sale.

Historically, 75 percent of accounts payable have been paid one month after receipt of the
purchased components, and the remaining 25 percent is paid two months after receipt.

Hourly wages and fringe benefits, estimated to be 30 percent of the current month's sales, are
paid in the month incurred.

General and administrative expenses are projected to be $15,620,000 for the year. The
breakdown of these expenses is presented below. All expenditures are paid uniformly throughout
the year, except the property taxes which are paid at the end of each quarter in four equal
installments.

2012 Forecasted General and Administrative Costs


(in thousands)
Salaries and fringe benefits

$ 3,200

Promotion

3,800

Property taxes

1,360

Insurance

2,000

Utilities

1,800

Depreciation

3,460

Total

$15,620

Income tax payments are made at the beginning of each calendar quarter based on the income of
the prior quarter. Alpha-Tech is subject to an effective income tax rate of 40 percent. AlphaTech's operating income for the first quarter of 2012 is projected to be $3,200,000. The company
pays 100 percent of the estimated tax payment.

2010 CMA Part 1


Section A Budgeting
Alpha-Tech

Alpha-Tech maintains a minimum cash balance of $500,000. If the cash balance is less than
$500,000 at the end of each month, the company borrows amounts necessary to maintain this
balance. All amounts borrowed are repaid out of subsequent positive cash flow. The projected
April 1, 2012 opening balance is $500,000.

Alpha-Tech has no short-term debt as of April 1, 2012.

Alpha-Tech uses a calendar year for both financial reporting and tax purposes.

REQUIRED:
A.

Prepare a cash budget for Alpha-Tech by month for the second quarter of 2012. Ignore any
interest expense associated with borrowing.

B.

Discuss why cash budgeting is important for Alpha-Tech.

2010 CMA Part 1


Section A Budgeting
Alpha-Tech
Solution
A. The pro forma cash budget for Alpha-Tech for the second quarter of 1995 is presented below.
Supporting calculations are presented on the next page.
Alpha-Tech
Cash Budget
For the Second Quarter 2012
Beginning balance
Collections (1)
February sales
March sales
April sales
May sales

April
500,000

4,000,000
5,400,000

May
500,000

3,600,000
6,900,000

June
$ 1,230,000

4,600,000
7,500,000

Total receipts

9,400,000

10,500,000

12,100,000

Total cash available

9,900,000

11,000,000

13,330,000

4,155,000
3,450,000
900,000

4,735,000
3,750,000
900,000

5,285,000
4,200,000
900,000
340,000

9,785,000

9,385,000

10,725,000

Cash balance

115,000

1,615,000

2,605,000

Cash borrowed

385,000

Disbursements
Accounts payable
Wages (2)
General & Admin (3)
Property taxes
Income taxes (4)
Total disbursements

1,280,000

Cash repaid
Ending balance
(1)
(2)
(3)
(4)

(385,000)
$500,000

$1,230,000

$2,605,000

60% of sales in first month; 40% of sales in second month.


30% of current month sales.
(Total less property taxes and depreciation) / 12.
40% x $3,200,000 million.

B. Cash budgeting is important for Alpha-Tech because as sales grow so will expenditures for input
factors. Since these expenditures generally precede cash receipts, the company must plan for possible
financing to cover the gap between payments and receipts. The cash budget shows the probable cash
position at certain points in time, allowing the company to plan for borrowing, as Alpha-Tech must do
in April.
Cash budgeting also facilitates the control of excess cash. The company may be losing investment
opportunities, if excess cash is left idle in a checking account. The cash budget alerts management to
periods when there will be excess cash available for investment, thus facilitating financial planning
and cash control.

2010 CMA Part 1


Section A Budgeting
Alpha-Tech
Supporting Calculations
Accounts payable - parts received:
Cost of goods sold
Month

40% of sales

February
March
March
April
April
May
May
June

Timing

$4,000,000
3,600,000
3,600,000
4,600,000
4,600,000
5,000,000
5,000,000
5,600,000

.30
.70
.30
.70
.30
.70
.30
.70

$3,720,000
4,300,000
4,300,000
4,880,000
4,880,000
5,420,000

.25
.75
.25
.75
.25
.75

February
$ 1,200,000
2,520,000

$ 3,720,000

March

$1,080,000
3,220,000

$4,300,000

April

$1,380,000
3,500,000
$4,880,000

May

June

$1,500,000
3,920,000
$5,420,000

(5)

Payments
February
March
March
April
April
May

(5)

$0

$0

930,000
3,225,000

$4,155,000

$1,075,000
3,660,000
$4,735,000

$1,220,000
4,065,000
$5,285,000

No calculation of COGS is needed for June because the payments will be made in July and
August, which is outside the second quarter. (This note added by HOCK.)