Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company’s operations:

The cash balance on December 1 is $53,400.

Actual sales for October and November and expected sales for December are as follows:

	October		November		December
Cash sales	$	77,000	$	81,200	$	87,800
Sales on account	$	435,000	$	538,000	$	644,000

Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible.

Purchases of inventory will total $341,000 for December. Thirty percent of a month’s inventory purchases are paid during the month of purchase. The accounts payable remaining from November’s inventory purchases total $165,000, all of which will be paid in December.

Selling and administrative expenses are budgeted at $516,000 for December. Of this amount, $94,900 is for depreciation.

A new web server for the Marketing Department costing $121,500 will be purchased for cash during December, and dividends totaling $13,000 will be paid during the month.

The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company’s bank to increase its cash balance as needed.

Required:

1. Calculate the expected cash collections for December.

2. Calculate the expected cash disbursements for merchandise purchases for December.

3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

Answer 1

1	Calculate the expected cash collections for december
	Particulars	$
	December cash sales	87800
	Collections on account
	October sales (435000*18%)	78300
	November sales (538000*60%)	322800
	December sales (644000*20%)	128800
	Total cash collections	617700
2	Calculate expected cash disbursements for merchandise purchases for december
	Schedule of expected cash disbursements
	Particulars	$
	November purchase	165000
	December purchase (341000*30%)	102300
		267300
3	Prepare a cash budget for December
	Aston company
	cash budget
	For the month of december
		$	$
	Beginning cash Balance		$53,400
	Add: collection from customers		617700
	Total cash available		$6,71,100
	Less cash disbursements
	Payments to suppliers for inventory	267300
	Selling and administrative expense (516000-94900)	421100
	New web server	121500
	Dividends Paid	13000
	Total cash disbursements		822900
	Excess (deficiecy) of cash available over disbursements		($1,51,800)
	Financing:
	Borrowings		171800
	Repayments
	Interest
	Total financing		171800
	Ending cash Balance		$20,000