Friendship Products, Inc._Cash Budget

The controller of Friendship Products, Inc. instructs you to prepare a monthly cash budget
for the next three months. You are presented with the following budget information:

	August	September	October
Sales	$ 6,30,000	$ 7,15,000	$ 8,45,000
Manufacturing costs	3,50,000	3,60,000	4,10,000
Selling and Administrative expenses	1,70,000	2,05,000	2,35,000
Capital expenditures			1,50,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are
expected to be collected in full in the month following the sale and the remainder the following
month. Depreciation, insurance, and property tax expense represent $25,000 of the estimated
monthly manufacturing costs. The annual insurance premium is paid in July, and the annual
property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are
expected to be paid in the month in which they are incurred and the balance in the following month.

Current assets as of August 1 include cash of $50,000, marketable securities of $85,000, and accounts
receivable of $635,000 ($500,000 from July sales and $135,000 from June sales). Sales on account for
June and July were $450,000 and $500,000, respectively. Current liabilities as of August 1 include
a $100,000, 15%, 90-day note payable due October 20 and $65,000 of accounts payable incurred in
July for manufacturing costs. All selling and administrative expenses are paid in cash in the period
they are incurred. It is expected that $1,800 in dividends will be received in August. An estimated
income tax payment of $39,000 will be made in September. Friendship's regular quarterly dividend
of $12,000 is expected to be declared in September and paid in October. Management desires to
maintain a minimum cash balance of $40,000.


Instructions

1. Prepare a monthly cash budget and supporting schedules for August, September, and October.

2. On the basis of the cash budget prepared in instruction 1, what recommendation should be
made in to the controller?

12 years ago

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