Question

Problem H-3
May Cole is the manager of the Real Time Inn and has completed the operating budgets
for the next three years as shown below. She is now ready to prepare the cash budget.
	Operating Budgets 20X1 - 20X3
	20X1	20X2	20X3
Sales	$1,000,000	$1,400,000	$1,800,000
Direct Expenses	450,000	650,000	750,000
Depreciation	100,000	100,000	100,000
Other Fixed Expenses	350,000	450,000	650,000
Income Before Taxes	100,000	200,000	300,000
Income Tax	40,000	80,000	120,000
Net Income	$60,000	$120,000	$180,000
Additional Information
1. Dividends paiid in a given year are estimated to be 50% of net incom for that year, but
cash is not to be reduced to less than $150,000 at the end of any year.
2. The following is a summary of the only current accounts that are expected to change:
		20X1	20X2	20X3
Accounts Receivable		-10,000	20,000	20,000
Accounts Payable		10,000	15,000	20,000
3. A major piece of equipment that costs $100,000 is scheduled for purchase during 20X3
May Cole would like to purchase the machine with cash and by borrowing long-term funds.
The funding will be 50/50.
4. The cash balance at the beginning of 20X1 is $20,000.
5. Assume that the income tax for each year is paid in the year it is shown as an expense.
Required:
Prepare cash budgets for 20X1-20X3 for the Real Time Inn using the adjusted net income
approach.

Answer 1

		CASH BUDGET
			20X1	20X2	20X3
	A	Beginning cash balance	$20,000	$170,000	$325,000
		Cash flow during the year:
	B	Net Income	$60,000	$120,000	$180,000
	C	Non cash expense(depreciation)	$100,000	$100,000	$100,000
	D	(Increase) decrease in accounts receivable	$10,000	($20,000)	($20,000)
	E	Increase(decrease) in accounts payable	$10,000	$15,000	$20,000
	F=B+C+D+E	Net Cash received from operations	$180,000	$215,000	$280,000
	G=A+F	Total Cash Available	$200,000	$385,000	$605,000
		Other cash Payments:
	H=0.5*B	Dividend payment	$30,000	$60,000	$90,000
	I	Purchase of equipment	$0	$0	$50,000	(50% of $100000)
	J=H+I	Total amount of cash payment (excluding operations)	$30,000	$60,000	$140,000
	K=G-J	End of year cash balance	$170,000	$325,000	$465,000