UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS ADMINISTRATION

CASH BUDGET TUTORIAL SHEET

1. You have been asked to prepare a 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 will be $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 in the following ratio: 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 the purchase with the balance being
paid the following month. 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 must maintain 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.

Required:
1. Prepare a schedule of expected cash collections for December.
2. Prepare a schedule of expected cash disbursements for materials during December to
suppliers for inventory purchases.
3. Prepare a cash budget for December. Indicate in the financing section any
borrowing/repayment that will be needed during the month.

Question 2

Herbal Care Corp., a distributor of herb-based sun screens, is ready to begin its third quarter,
in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank
to help meet cash requirements during the quarter. Since Herbal Care has experienced
difficulty in paying off its loans in the past, the loan officer at the bank has asked the
company to prepare a cash budget for the quarter. In response to this request, the following
data has been assembled.
a. On July 1, the beginning of the third quarter, the company will have a cash balance of
$44,500.
b. Actual sales for the last two months and budgeted sales for the third quarter follow:
May (actual)……………………$250,000
June (actual)……………………300,000
July (budgeted)…………………400,000
August (budgeted)………………600,000
September (budgeted)…………..320,000

Past experiences show that 25% of a month’s sales are collected in the month of the sale, 70% in
the month following the sale, and 3% in the second month following the sale. The remainder is
uncollectible.
 c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given
below:
July August September
Merchandise purchases……..$240,000 $350,000 $175,000
Salaries and wages…………….45,000 50,000 40,000
Advertising…………………...130,000 145,000 80,000
Rent payments…………………. 9,000 9,000 9,000
Depreciation…………………...10,000 10,000 10,000

Merchandise purchases are paid in full during the month following purchase. Accounts
payable for merchandise purchases on June 30, which will be paid during July, total
$180,000.

d. Equipment costing $10,000 will be purchased for cash during July.

e. In preparing the cash budget, assume that the $40,000 loan will be made in July and
repaid in September. Interest on the loan will total $1,200.

Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for
the quarter in total.
2. Prepare a cash budget, by month and in total, for the third quarter.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the
loan be repaid as planned? Explain.

QUESTION 3
Garden Sales Inc., sells garden supplies. Management is planning its cash needs for the
second quarter. The company usually has to borrow money during this quarter to support
peak sales of lawn care equipment, which occur during May. The following information
has been assembled to assist in preparing a cash budget for the quarter:

a. Budgeted monthly income statements for April-July are:

April May June July

Sales………………… $600,000 $900,000 $500,000 $400,000

Cost of goods sold…… 420,000 630,000 250,000 280,000
Gross margin 180,000 270,000 150,000 120,000

Less operating expenses:

Selling expense………… 79,000 120,000 62,000 51,000
Administrative expense*… 45,000 52,000 41,000 38,000
Total expenses………… 124,000 172,000 103,000 87,000
Net income……………… 56,000 98,000 47,000 31,000
*Includes $20,000 depreciation each month.

b. Sales are 20% for cash and 80% on account.

c. Sales on account are collected over a three-month period in the following ratio:10%
collected in the month of sale; 70% collected in the first month following the month of
sale; and the remaining 20% collected in the second month following the month of sale.
February’s sales totaled $200,000, and March’s sales totaled $300,000.
d. Inventory purchases are paid for within 17 days. Therefore, 50% of a month’s inventory
purchases are paid for in the month of purchase. The remaining 50% is paid in the
following month. Accounts payable at March 31 for inventory purchases during March
total $126,000.
e. At the end of each month, inventory must be on hand equal to 20% of the cost of the
merchandise to be sold in the following month. The merchandise inventory at March 31
is $84,000.
f. Dividends of $49,000 will be declared and paid in April.
g. Equipment costing $16,000 will be purchased for cash in May.
h. The cash balance at March 31 is$52,000; the company must maintain a cash balance of at
least $40,000 at all times.
i. The company can borrow from its bank as needed to bolster the Cash account.
Borrowings and repayments must be in multiples of $1,000. All borrowings take place at
the beginning of a month, and all repayments are made at the end of a month. The annual
interest rate is 12%. Compute interest on whole months (1/12, 2/12, and so forth).
Required:
1. Prepare a schedule of expected cash collections from sales for each of the months April,
May, June, and for the quarter in total.
2. Prepare the following budgets:
a. An inventory purchases budget for each of the months April, May, and June.
b. A cash budget for the third quarter, by month as well as in total for the quarter. Show
borrowings from the company’s bank and repayments to the bank as needed to maintain
the minimum cash balance.

QUESTION 4
You have just been hired as a new management trainee by Earrings Unlimited, a
distributor of earrings to various retail outlets located in shopping malls across the
country. In the past, the company has done very little in the way of budgeting and at
certain times of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided to prepare
comprehensive budgets for the upcoming second quarter in order to show management
the benefits that can accounting and other areas to gather the information gather the
information assessment below.
The company sells many styles of earrings, but all are sold for the same proce-
$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the
next six months follow (in pairs of earrings):

January (actual)…..20,000 May(budget)..……………….50,000

February(actual)….26,000 June (budget)……………… 30,000
March (actual)……40,000 July (budget)………………...28,000
April (budget)…….65,000 August (budget)……………..25,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory
should be on hand at the end of each month to supply 40% of the earrings sold in the following
month.
Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in
the month of purchase; the other half is paid for in the following month. All sales are on credit,
with no discount, and payable within 15 days. The company has found, however, that only 20%
of a month’s sales are collected in the month of sale. An additional 70% is collected in the
following month, and the remaining 10% is collected in the second month following sale. Bad
debts have been negligible.
Monthly operating expenses for the company are given below:

Variable:
Sales commissions………………..4% of sales
Fixed:
Advertising…………………………. $200,000
Rent…………………………………. 18,000
Salaries……………………………… 106,000
Utilities……………………………… 7,000
Insurance expired…………………… 3,000
Depreciation………………………… 14,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $16,000 in new equipment during May and $40,000 in new
equipment during June; both purchases will be for cash. The company declares dividends of
$15,000 each quarter, payables in the first month of the following quarter.

A listing of the company’s ledger accounts as of March 31 is given below:

Assets & Liabilities $

Cash……………………………………………… 74,000
Accounts receivable ($26,000February sales
$320,000 March sales)………………………….. 346,000
Inventory………………………………………... 104,000
Prepaid insurance………………………………… 21,000
Property and equipment (net)……………………. .950,000
Accounts payable……………………………… 100,000
Dividends payable…………………………….. 15,000
Capital stock………………………………….. 800,000
Retained earnings………………………………. 580,000
Part of the budgeting program will be to establish an ongoing line of credit at a local bank.
Therefore, determine the borrowing that will be needed to maintain a minimum cash balance of
$50,000. All borrowing will be done at beginning of a month; any repayments will be made at the
end of a month.
The annual interest rate will be 12%. Interest will be computed and paid at the end of each quarter
on all loans outstanding during the quarter. Compute interest on whole months (1/12, 2/12, and so
forth).

Required:
Prepare a master budget for the three-month period ending June30. Include the following detailed
budgets:
1. a. A sale budget, by month and in total.
b.A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by
month and I total.
d. A schedule of expected cash disbursements for merchandise purchases, by
month and in total.
2. A cash budget. Show the budget by month and in total.