Question

Cruises, Inc. has budgeted sales revenues as follows:
	June	July	August
Credit Sales	$135,000	$135,000	$90,000
Cash Sales	90,000	225,000	195,000
Total Sales	$225,00	$380,000	$285,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Cash disbursements were $421,000 for July and $250,500 for August. The company wishes to maintain a minimum cash balance of $50,000 at the end of each month. To maintain the minimum cash balance, if necessary, the company borrows money from the bank at a 6% annual interest rate. Any outstanding loans are repaid in the months when there is an excess cash balance. The beginning cash balance on July 1 was $50,000. Prepare a cash budget for the months of July and August. Prepare a seperate schedule for expected collections from the customers.

Answer 1

Cruises Inc

	Cash Budget for the months of July and August
	July	August	Total
Beginning Cash balance	$50,000	$50,000	$100,000
Cash sales	$245,000	$195,000	$440,000
Expected Collections from Customers	$135,000	$108,000	$243,000
Available Cash	$430,000	$353,000	$783,000
Cash disbursements	$421,000	$250,500	$671,500
Excess/(surplus) of available cash over disbursements	$9,000	$102,500	$111,500
Minimum required cash balance	$50,000	$50,000	$100,000
Financing:
Borrowing	$41,000		$41,000
Interest		($205)	($205)
Repayments		($41,000)	($41,000)
Ending Cash Balance	$50,000	$61,295	$111,295

Schedule of Expected Collections from Customers:
	July	August
	July	August
June Collections, 40% credit sales	$54,000
July Collections	$81,000	$54,000
August Collections, 60% credit sales		$54,000
Total collections	$135,000	$108,000

The total sales for July in the question is given as $380,000. However, the sum of credit sales ($135,000) and cash sales ($225,000) totals to only $360,000. Hence, in the solution we have added the difference $20,000 to cash sales to prepare the cash budget.

Interest calculation –

$41,000 x 6% x 1/12 = $205

Expected cash collections of July credit sales = $135,000 x 60% = $81,000 in the month of July

Expected cash collections of July credit sales in August = $135,000 x 40% = $54,000 in the month of August