ACCT504 Case Study 3 on Cash Budgeting

It is recommended that you share this solution file in Doc Sharing by the end of Week 5 with your students.

The Cambridge Company has budgeted sales revenues as follows.

Jan Feb Mar

Credit sales $45,000 $36,000 $27,000

Cash sales 27,000 76,500 58,500

Total sales $72,000 $112,500 $85,500

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month.

Purchases of inventory are all on credit and 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $97,500 in January, $67,500 in February, and $31,500 in March.

Other budgeted cash receipts: (a) sale of plant assets for $18,525 in February, and (b) sale of new common stock for $25,275 in March. Other budgeted cash disbursements: (a) operating expenses of $10,125 each month, (b) selling and administrative expenses of $18,750 each month, (c) dividends of $28,500 will be paid in February, and (d) purchase of equipment for $9,000 cash in March.

The company has a cash balance of $15,000 at the beginning of February and wishes to maintain a minimum cash balance of $15,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of February 1.

Requirements:

1. Use this information to prepare a cash budget for the months of February and March using the template provided in Doc Sharing.

ACCT 504 Sample Case Study 3 On Cash Budgeting Solution

1.

CAMBRIDGE COMPANY

Cash Budget

For the 2 Months of February and March

Feb Mar

Beginning cash balance $15,000 $15,000

Add: Receipts

Collections from customers 39,600 30,600

Sale of plant assets 18,525

Sale of new common stock 25,275

Cash sales 76,500 58,500

Total receipts 134,625 114,375

Total available cash 149,625 129,375

Less: Disbursements

Purchases of inventory 85,500 53,100

Operating expenses 10,125 10,125

Selling and administrative expenses 18,750 18,750

Dividends 28,500

Equipment purchase 9,000

Total disbursements 142,875 90,975

Excess (deficiency) of available cash over disbursements 6,750 38,400

Financing

Borrowings 8,250

Repayments (8,415)*

Ending cash balance $15,000 $29,985

*8,250 × 12% × 2/12 = $165 + $8,250 = $8,415

Schedule of Expected Collections From Customers

Credit sales Feb Mar

Jan (45,000 × 40%) $18,000

Feb ($36,000 x 60%), Mar ($36,000 x 40%) 21,600 $ 14,400

Mar ($27,000 × 60%) 16,200

Total collections $39,600 $30,600

Schedule of Expected Payments for Purchase of Inventory

Inventory purchases Feb Mar

Jan ($97,500 x 60%) $58,500

Feb ($67,500 x 40%), Mar ($67,500 x 60%) 27,000 $40,500

Mar ($31,500 x 40%) 12,600

Total payments $85,500 $53,100