Question

The controller of Rise Coffee House (RCH) Company wishes to improve the company’s control system by preparing a month-by-month cash budget. The following information relates to the month ending July 31, 2020.

June 30, 2020 cash balance $ 45,000 Dividends to be declared on July 15 1 $ 12,000 Cash expenditures to be paid in July for operating expenses $ 36,800 Amortization expense in July $ 4,500 Cash collections to be received in July $ 89,000 Merchandise purchases to be paid in cash in July $ 56,200 Equipment to be purchased for cash in July $ 20,500

RCH Company wishes to maintain a minimum cash balance of $25,000. 1 Dividends are payable to shareholders of record on declaration date, 30 days after declaration.

Required a. Prepare a cash budget for the month ended July 31, 2020, and indicate how much, if anything, RCH will need to borrow to meet its minimum cash requirement.

b. Explain how cash budgeting can reduce the cost of short-term borrowing.

Answer 1

Cash Budget for the month ended July 31,2020
Particulars	Amount($)	Amount($)
Opening Cash Balance on July 01		45000
Add:
Cash Collections	89000
		89000
		134000
Less:
Operating Expenses	36800
Merchandise Purchases	56200
Equipment Purchase	20500
		113500
		20500
Short Term Borrowing(Bal Fig)=25000-20500		4500
Balance(To be Maintained) on July 31st		25000

Notes:

1.Dividends though declared are payable only after 30 days from declaration i.e on August 15,hence need not be considered in July's budget.

2.Amortisation expense is a non cash expense.

b. Short term borrowings usually come with High rate of interest. And only units with good credit rating can be eligible for such short term borrowings. hence cash budget obviates short term borrowings and allows the firm to have a control over the expenses to be incurred.