Question

You have just been contracted as a budget consultant by LBJ Company, a distributor of bracelets to various retail outlets across the country. The company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

You have decided to prepare a cash budget for the upcoming fourth quarter in order to show management the benefits that can be gained from proper cash planning. You have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of bracelets, but all are sold for the same $10 price. Actual sales of bracelets for the last three months and budgeted sales for the next six months follow:

July (actual)	20,000
August (actual)	26,000
September (actual)	40,000
October (budget)	70,000
November (budget)	110,000
December (budget)	60,000
January (budget)	30,000
February (budget)	28,000
March (budget)	25,000

The concentration of sales in the fourth quarter is due to the Christmas holiday. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month.

Suppliers are paid $4 for each bracelet. Fifty-percent of a month's purchases is paid for in the month of purchase; the other 50% is paid for in the following month. All sales are on credit with no discounts. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable expenses:

Sales commissions                      4% of sales

Fixed expenses:

Advertising                                   $220,000

Rent                                            $20,000

Salaries                                         $110,000

Utilities                                              $10,000

Insurance                                           $5,000

Depreciation                                     $18,000

Insurance is paid on an annual basis, in January of each year.

The company plans to purchase $22,000 in new equipment during October and $50,000 in new equipment during November; both purchases will be for cash. The company declares dividends of $20,000 each quarter, payable in the first month of the following quarter.

Other relevant data is given below:

Cash balance as of September 30                     $74,000

Inventory balance as of September 30             $112,000

Merchandise purchases for September            $200,000

The company maintains a minimum cash balance of at least $50,000 at the end of each month. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.

Required:

Prepare the following budgets for the three-month period ending December 31:

1.

a. A sales budget, by month and in total.

b. A schedule of expected cash collections from sales, by month and in total.

c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

Answer 1

a) Sales Budget
Particular	October	November	December	Total
Budgeted sales unit	70000	110000	60000	240000
Selling Price	$10.00	$10.00	$10.00
Budgeted Sales Value	$700,000	$1,100,000	$600,000	$2,400,000

b)Schedule of expected cash collections
Particular	October	November	December	Total
Current Month sales - 20%	$140,000	$220,000	$120,000	$480,000
Following months collection - 70%	$280,000	$490,000	$770,000	$1,540,000
second months collection - 10%	$26,000	$40,000	$70,000	$136,000
Total monthly collection	$446,000	$750,000	$960,000	$2,156,000

c) Merchandise purchase budget
Particular	October	November	December	Total
Number of units required for monthly sales	70000	110000	60000	240000
Closing inventory desired - 40% of following month	44000	24000	12000	80000
Total units required	114000	134000	72000	320000
Less : opening inventory	16000	44000	24000	84000
Merchandise purchased ( units)	98000	90000	48000	236000
Price per unit	$4	$4	$4
Merchandise purchased ( $)	$392,000	$360,000	$192,000	$944,000

d)Schedule of cash disbursements
	October	November	December	Total
Current months purchase - 50%	$196,000	$180,000	$96,000	$472,000
Previous months purchase - 50%	$100,000	$196,000	$180,000	$476,000
Total cash disbursements	$296,000	$376,000	$276,000	$948,000

2)Cash Budget for 4th Quarter
Particular	October	November	December	Total
Opening cash balance	$74,000	$50,000	$50,000	$174,000
Cash received from sales	$446,000	$750,000	$960,000	$2,156,000
Tital cash received	$520,000	$800,000	$1,010,000	$2,330,000
Less :
Merchandise Purchased	$296,000	$376,000	$276,000	$948,000
Variable expenses - 4% of sales	$28,000	$44,000	$24,000	$96,000
Fixed Expenses
Advertising	$220,000	$220,000	$220,000	$660,000
Rent	$20,000	$20,000	$20,000	$60,000
Salaries	$110,000	$110,000	$110,000	$330,000
Utilities	$10,000	$10,000	$10,000	$30,000
Equioment Purchase	$22,000	$50,000		$72,000
Fdividend paid for previous quarter	$20,000			$20,000
Total cash disbursement	$726,000	$830,000	$660,000	$2,216,000
Closing balance	-$206,000	-$30,000	$350,000	$114,000
Minimum cash required	$50,000	$50,000	$50,000
Bank borrowing	$256,000	$80,000	$0

Revised cash budget For 4th Quarter
Particular	October	November	December	Total
Opening cash balance	$74,000	$50,000	$50,000	$174,000
Cash received from sales	$446,000	$750,000	$960,000	$2,156,000
Bank Borrowing	$256,000	$80,000	$0	$336,000
Tital cash received	$776,000	$880,000	$1,010,000	$2,666,000
Less :
Merchandise Purchased	$296,000	$376,000	$276,000	$948,000
Variable expenses - 4% of sales	$28,000	$44,000	$24,000	$96,000
Fixed Expenses
Advertising	$220,000	$220,000	$220,000	$660,000
Rent	$20,000	$20,000	$20,000	$60,000
Salaries	$110,000	$110,000	$110,000	$330,000
Utilities	$10,000	$10,000	$10,000	$30,000
Equioment Purchase	$22,000	$50,000		$72,000
Fdividend paid for previous quarter	$20,000			$20,000
Total cash disbursement	$726,000	$830,000	$660,000	$2,216,000
Closing balance	$50,000	$50,000	$350,000	$450,000
Loan Repayment :
Interest @ 1% pm
borrowing in October - interest for 3 months = 256000 *3% =		$7,680
borrowing in November - interest for 2 months = 80000 *2% =		$1,600
Total interest payable		$9,280
Cash available at emfd of the quarter	$350,000
Minimum cash required	$50,000
Balance available to pay off loan ( with interest)	$300,000
Interest paid	$9,280
Balance principle paid	$290,720

Final Cash Budget for 4th Quarter
Particular	October	November	December	Total
Opening cash balance	$74,000	$50,000	$50,000	$174,000
Cash received from sales	$446,000	$750,000	$960,000	$2,156,000
Bank Borrowing	$256,000	$80,000	$0	$336,000
Total cash received	$776,000	$880,000	$1,010,000	$2,666,000
Less :
Merchandise Purchased	$296,000	$376,000	$276,000	$948,000
Variable expenses - 4% of sales	$28,000	$44,000	$24,000	$96,000
Fixed Expenses
Advertising	$220,000	$220,000	$220,000	$660,000
Rent	$20,000	$20,000	$20,000	$60,000
Salaries	$110,000	$110,000	$110,000	$330,000
Utilities	$10,000	$10,000	$10,000	$30,000
Equioment Purchase	$22,000	$50,000		$72,000
dividend paid for previous quarter	$20,000			$20,000
Loan paid with interest			$300,000	$300,000
Total cash disbursement	$726,000	$830,000	$960,000	$2,516,000
Closing balance	$50,000	$50,000	$50,000	$150,000