Question

Herald company, a jacket selling company, prepares its master budget for the year 2020 on a quarterly basis. The budget officer has gathered the following data:

1. Estimated Sales for each quarter is $230,000. All sales are on credit and all sales are collected in the following quarter.

2. Cost of goods sold for each quarter is $100,000.

3. Variable selling and administrative expenses for each jacket are 10% sales commission.

4. Fixed selling and administrative (S&A) expenses for the year are:

Advertising	$60,000
Executive salaries	$110,000
Insurance	$40,000
Depreciation	$20,000
Total fixed S&A expenses	$230,000

5. The company expects to borrow $80,000 on April, 1, 2020. No principal will be repaid during the year; Interest rate at an annual rate of 10% is due quarterly.

6. The company will declare $3,000 dividend in December 2020, which will be paid in January 2021.

The company's expected total cash receipt from sales is $690,000 and expected cash disbursements from manufacturing costs is $90,000 during the year 2020. If the year's beginning balance of cash is $25,000, what is the ending balance of cash in the year 2020?

Answer 1

Ans:

Calculation of closing cash balance:

	Amount ($)
Opening Cash Balance	25,000
Cash generated from Sales (Given)	690,000
Expected amount borrowed	80,000
Less: Outflows
Manufacturing costs (Given)	(90,000)
Variable selling overhead (10% of $920,000-annual sales)	(92,000)
Fixed expenses (Given)	(230,000)
Interest Expense on borrowed funds ($2,000 * 3 for 3 quarters)	(6,000)
Closing Cash Balance	377,000

Calculation of interest on borrowed funds: 80,000*10%*3/12 = $2,000 for each quarter.