Question

The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

	May		June		July
Sales	$90,000		$108,000		$148,000
Manufacturing costs	38,000		46,000		53,000
Selling and administrative expenses	26,000		29,000		33,000
Capital expenditures	_		_		36,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent $9,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 75% are expected to be paid in the month in which they are incurred and the balance in the following month.

Current assets as of May 1 include cash of $34,000, marketable securities of $49,000, and accounts receivable of $100,600 ($79,000 from April sales and $21,600 from March sales). Sales on account for March and April were $72,000 and $79,000, respectively. Current liabilities as of May 1 include $11,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $13,000 will be made in June. Sonoma’s regular quarterly dividend of $9,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $27,000.

Required:

1. Prepare a monthly cash budget and supporting schedules for May, June, and July. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign.

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	$	$	$
Collection of accounts receivable
Total cash receipts	$	$	$
Estimated cash payments for:
Manufacturing costs	$	$	$
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments	$	$	$
Cash increase or (decrease)	$	$	$
Cash balance at beginning of month
Cash balance at end of month	$	$	$
Minimum cash balance
Excess or (deficiency)	$	$	$

Feedback

2. The budget indicates that the minimum cash balance will not be maintained in July. This situation can be corrected by borrowing and/or by the sale of the marketable securities, if they are held for such purposes. At the end of May and June, the cash balance will exceed the minimum desired balance.

Answer 1

	May	June	July
Sales	90,000	1,08,000	1,48,000
Cash Sales (A)	9,000	10,800	14,800
Credit Sales	81,000	97,200	1,33,200
Previous Month Sale (B)	55,300	56,700	68,040
Two month prior sale (C)	21,600	23,700	24,300
Total Cash Collection=A+B+C	85,900	91,200	1,07,140

	May	June	July
Manufacturing Cost	38,000	46,000	53,000
Insurance, Property Tax & Depreciation	9,000	9,000	9,000
Remaining Manufacturing Cost	29,000	37,000	44,000
Cash Payments for Manufacturing Exp:
Current Month Purchase (75%)	21,750	27,750	33,000
Previous Month Purchase (25%)	11,000	7,250	9,250
Total payment	32,750	35,000	42,250

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	9,000	10,800	14,800
Collection of accounts receivable	76,900	80,400	92,340
Total cash receipts	85,900	91,200	1,07,140
Estimated cash payments for:
Manufacturing costs	32,750	35,000	42,250
Selling and administrative expenses	26,000	29,000	33,000
Capital expenditures	-	-	36,000
Other purposes:
Income tax	-	13,000
Dividends	-		9,000
Total cash payments	58,750	77,000	1,20,250
Cash increase or (decrease)	27,150	14,200	(13,110)
Cash balance at beginning of month	34,000	27,000	27,000
Cash balance at end of month	61,150	41,200	13,890
Minimum cash balance	27,000	27,000	27,000
Excess or (deficiency)	34,150	14,200	(13,110)

Note: It is assumed that any excess cash balance at the end of each month above $ 27,000 is invested somewhere by the company and hence closing balance for that month is reached at $27,000. Accordingly, opening balance of cash for sunsequent month is taken as 27,000.

However, it is assumed that exess cash balance is not invested by the company and is carried forward to next month, Cash Budget will be as follows:

Sonoma Housewares Inc.
Cash Budget
For the Three Months Ending July 31
	May	June	July
Estimated cash receipts from:
Cash sales	9,000	10,800	14,800
Collection of accounts receivable	76,900	80,400	92,340
Total cash receipts	85,900	91,200	1,07,140
Estimated cash payments for:
Manufacturing costs	32,750	35,000	42,250
Selling and administrative expenses	26,000	29,000	33,000
Capital expenditures	-	-	36,000
Other purposes:
Income tax	-	13,000
Dividends	-		9,000
Total cash payments	58,750	77,000	1,20,250
Cash increase or (decrease)	27,150	14,200	(13,110)
Cash balance at beginning of month	34,000	61,150	75,350
Cash balance at end of month	61,150	75,350	62,240
Minimum cash balance	27,000	27,000	27,000
Excess or (deficiency)	34,150	48,350	35,240