Question

Potter Corporation sells office supplies to government agencies. At the beginning of the current quarter, the company reports the following selected account balances:  
Current quarter account balances:  
Cash 10,000  
Accounts Receivables 200,000  
Current Payable 85,000  

Potter's management has made the following budget estimates regarding operations for the current quarter:  
Sales (estimated) 500,000  
Total cost and expenses (estimated) 400,000 (see breakdown below)
Debt service payment (estimated) 145,000  
Tax liability payment (estimated) 45,000  

Of Potter's total costs and expenses, $30,000 is quarterly depreciation expense, and $20,000 represents the expiration of prepayments. The remaining $350,000 is to be financed with current payable. The company's ending prepayments balance is expected to be the same as its beginning prepayments balance. It’s ending current payable balance is expected to be $20,000 more than its beginning balance.  
All of Potter's sales are on account. Approximately 65 percent of its sales are collected in the quarter in which they are made. The remaining 35 percent are collected in the following quarter. Because all of the company's sales are made to government agencies, it experiences virtually no uncollectible accounts.  

Potter's minimum cash balance requirement is $10,000. Should the balance fall below this amount, management negotiates a short-term loan with a local bank. The company's debt ratio (liabilities / assets) is currently 80 percent.  

Instructions: Prepare cash budget for the month of November, supported by schedules of cash collections on account receivable and cash payments for purchases of merchandise.

Answer 1

1)
Budgeted cash receipts for the quarter:
Collections on prior period receivables	$  200,000.00
Add: Collections on 65% of $500,000 sales	$  325,000.00
Total receipts collected during the quarter 535,000$	$  525,000.00
2)
Beginning current payables	85000
Add: New payables during quarter	350000
Total Payables	435000
Less: Ending current payables ($85,000 + $20,000)	-105000
Payments on current payables	330000
3)
If beginning prepayments equal the ending prepayments, the amount expired during the period equals the prepayments made during the period, or $20,000
4)
Potter's Cash Budget
Beginning cash	$    10,000.00
Add: Cash received from customers (part a.)	$  525,000.00
Cash available	$  535,000.00
Less: Payments on current payables (part b.)	$ (330,000.00)
Prepayments (part c.)	$   (20,000.00)
Taxes	$   (45,000.00)
Ending cash balance (deficit)	$  140,000.00