3 sections of a cash budget

Practice Case Study 3 On Cash Budgeting

ACCT504 Practice Case Study 3 on Cash Budgeting

This is a practice case study to help you become familiar with how to create a comprehensive cash budget. The cash budget relates to TCO D and is discussed in Chapter 7. Your professor will provide the solution by the end of Week 5 in Doc Sharing.

The actual case study assignmentshould be uploadedby 11:59 p.m.mountain time on Sunday at the end of Week 6 to the Week 6 AssignmentDropbox. You are encouraged to use the Excel template file provided in Doc Sharing.

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 DocSharing.

Please note: This is not a graded assignment, but your instructor will share the solution for this practice exercise by the end of Week 5. It is highly recommended that you try to build the cash budget on your own first.

Cash Budget Template
CASE STUDY 3 - Cash Budget Template
SCHEDULE OF EXPECTED CASH COLLECTIONS FROM CUSTOMERS:
Credit Sales May June
April 65,800
May 26,850 62,650
June 22,500
Total Cash Collections 92,650 85,150
SCHEDULE FOR EXPECTED PAYMENTS FOR PURCHASE OF INVENTORY
Inventory purchases May June
April 117,000
May 54,000 81,000
June 25,200
Total Payments for Inventory Purchases 171,000 106,200
LBJ Company
Cash Budget
For the Two Months of May and June
May June
Cash balance 20,000 24,500
Add: Receipts
Collections from customers 92,650 85,150
Sale of plant assets 33,000
Sale of new common stock 50,000
Cash sales 75,000 57,000
Total receipts 200,650 192,150
Total Available Cash 220,650 216,650
Less: Disbursements
Purchases of inventory 171,000 106,200
Operating expenses 15,000 15,000
Selling and administrative expenses 10,150 10,150
Equipment purchase 19,000
Dividends 20,000
Total disbursements 196,150 170,350
Excess (deficiency of available cash over disbursements) 24,500 46,300
Financing
Borrowings
Repayments
Ending cash balance 24,500 46,300
Please answer the 3 qualitative questions on the next tab called Qualitative Questions.
Qualitative Questions
1) What are the three sections of a Cash Budget, and what is included in each section?
The 3 sections of a cash budget are cash receipts, cash disbursements and financing. The cash receipts section includes expected receipts from the company’s principal source(s) of cash, such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company’s capital stock. The cash disbursements section shows expected payments for inventory, labor, overhead, and selling and administrative expenses. It also includes projected payments for income taxes, dividends, investments, and plant assets. The financing section shows expected borrowings and repayments of borrowed funds plus interest. Financing is needed when there is a cash deficiency or when the cash balance is less than management’s minimum required balance.
2) Why is a Cash Budget so vital to a company?
Cash is a vital life line for many businesses and therefore contributes to more effective cash management. A cash budget shows anticipated cash flows, usually over a one or-year period. It can show when a company will need additional financing, well before the actual need arises. On the hand, it can indicate when the company will have excess cash available for investments or other purposes. The alternative to a cash budget is one that is based on the availability of credit, or money that will have to be repaid down the line with interest. A cash budget therefor places limits on your purchasing and forces you to restrict discretionary purchases to items that you can pay for out of the cash you have on hand. Last but not least a cash budget can help to prepare you financially for seasonal fluctuations in sales and expenditures.
3) What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?
The basic principles of cash management include: a) increase the speed of receivables collection- the more quickly customers pay you, the more quickly you can use those funds b) keep inventory levels low- keep inventories level at just the size to conserve cash c) monitor the timing of payment of liabilities- don't pay bills too early or you will loose the ability to use that cash d) plan timing of major expenditures- make major expenditures when the company has excess cash e) invest idle cash- cash on hand earns nothing, consider investing to earn some extra cash in the form of interest