Cash Budget Assignment
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You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice is impressed with the work you have completed to date and would like to give you additional responsibility. She has asked you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.
Perfect Stitch Replica's Limited, a nationwide distributor of low-cost imitation clothing, has an exclusive agreement for the distribution of the clothing. Sales have grown so rapidly over the last few years that it has become necessary to add new members to the management team. To date, the company's budgeting practices have been minimal, and at times, the company has experienced a cash shortage. You have been given responsibility for all planning and budgeting.
Question 1: Prepare a master budget for the next three months, starting April 1.
Solution: Introduction
A master budget is to be prepared for the next three months starting from April 1 for Perfect Stitch Replica's Limited. The master budget includes preparation of sub-budgets including sales budget, material purchase budget, and other expenses budgets. There is a need to prepare cash budget as a master budget for the first quarter starting April and ending June for three months with the budgeted income statement and the budgeted balance sheet.
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Sale Budget
|
Sales Budget
|
April
|
May
|
June
|
Total
|
|
Sale Revenue
|
$6,50,000
|
$10,00,000
|
$5,00,000
|
$21,50,000
|
Workings:
|
|
January (actual)
|
February (actual)
|
March (actual)
|
April
|
May
|
June
|
July
|
August
|
September
|
|
Recent and forecast sales:
|
20,000
|
26,000
|
40,000
|
65,000
|
1,00,000
|
50,000
|
30,000
|
28,000
|
25,000
|
|
Sale price per unit
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
|
Revenue
|
$2,00,000
|
$2,60,000
|
$4,00,000
|
$6,50,000
|
$10,00,000
|
$5,00,000
|
$3,00,000
|
$2,80,000
|
$2,50,000
|
Schedule of Expected Cash Collections from Sales
|
Schedule of Expected Cash Collections from Sales
|
April
|
May
|
June
|
Total
|
|
20% Collection in same month of sale
|
$1,30,000
|
$2,00,000
|
$1,00,000
|
$4,30,000
|
|
70% collected in following month
|
$2,80,000
|
$4,55,000
|
$7,00,000
|
$14,35,000
|
|
10% collected in the second month
|
$26,000
|
$40,000
|
$65,000
|
$1,31,000
|
|
Total
|
$4,36,000
|
$6,95,000
|
$8,65,000
|
$19,96,000
|
Workings:
|
|
January (actual)
|
February (actual)
|
March (actual)
|
April
|
May
|
June
|
July
|
August
|
September
|
|
Recent and forecast sales:
|
20,000
|
26,000
|
40,000
|
65,000
|
1,00,000
|
50,000
|
30,000
|
28,000
|
25,000
|
|
Sale price per unit
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
$10
|
|
Revenue
|
$2,00,000
|
$2,60,000
|
$4,00,000
|
$6,50,000
|
$10,00,000
|
$5,00,000
|
$3,00,000
|
$2,80,000
|
$2,50,000
|
|
20% Collection in same month of sale
|
$40,000
|
$52,000
|
$80,000
|
$1,30,000
|
$2,00,000
|
$1,00,000
|
$60,000
|
$56,000
|
$50,000
|
|
70% collected in following month
|
|
$1,40,000
|
$1,82,000
|
$2,80,000
|
$4,55,000
|
$7,00,000
|
$3,50,000
|
$2,10,000
|
$1,96,000
|
|
10% collected in the second month
|
|
|
$20,000
|
$26,000
|
$40,000
|
$65,000
|
$1,00,000
|
$50,000
|
$30,000
|
|
Total
|
$40,000
|
$1,92,000
|
$2,82,000
|
$4,36,000
|
$6,95,000
|
$8,65,000
|
$5,10,000
|
$3,16,000
|
$2,76,000
|
Merchandise Purchases Budget
|
Purchase Materials in units
|
April
|
May
|
June
|
Total
|
|
Recent and forecast sales:
|
65000
|
100000
|
50000
|
215000
|
|
Ending inventory
|
40000
|
20000
|
12000
|
12000
|
|
Total Material units
|
105000
|
120000
|
62000
|
227000
|
|
Less: Opening inventory
|
26000
|
40000
|
20000
|
26000
|
|
Purchase Materials in units
|
79000
|
80000
|
42000
|
201000
|
|
Purchase Materials in $
|
April
|
May
|
June
|
Total
|
|
Purchase Materials in units
|
79000
|
80000
|
42000
|
201000
|
|
Cost per unit
|
$4
|
$4
|
$4
|
$4
|
|
Purchase materials in $
|
$3,16,000
|
$3,20,000
|
$1,68,000
|
$8,04,000
|
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Workings:
|
|
January (actual)
|
February (actual)
|
March (actual)
|
April
|
May
|
June
|
July
|
August
|
September
|
|
Recent and forecast sales:
|
20,000
|
26,000
|
40,000
|
65,000
|
1,00,000
|
50,000
|
30,000
|
28,000
|
25,000
|
|
Ending inventory
|
10400
|
16000
|
26000
|
40000
|
20000
|
12000
|
11200
|
10000
|
0
|
|
Total Material units
|
30,400
|
42,000
|
66,000
|
1,05,000
|
1,20,000
|
62,000
|
41,200
|
38,000
|
25,000
|
|
Less: Opening inventory
|
26000
|
10400
|
16000
|
26000
|
40000
|
20000
|
12000
|
11200
|
10000
|
|
Purchase Materials in units
|
4,400
|
31,600
|
50,000
|
79,000
|
80,000
|
42,000
|
29,200
|
26,800
|
15,000
|
|
Cost per unit
|
$4
|
$4
|
$4
|
$4
|
$4
|
$4
|
$4
|
$4
|
$4
|
|
Purchase Costs
|
$17,600
|
$1,26,400
|
$2,00,000
|
$3,16,000
|
$3,20,000
|
$1,68,000
|
$1,16,800
|
$1,07,200
|
$60,000
|
Cash Disbursements for Merchandise Purchases
|
Cash disbursements for merchandise purchases
|
April
|
May
|
June
|
Total
|
|
50% paid in purchase month
|
$1,58,000
|
$1,60,000
|
$84,000
|
$4,02,000
|
|
50% paid in following month
|
$1,00,000
|
$1,58,000
|
$1,60,000
|
$4,18,000
|
|
Total Cash disbursements
|
$2,58,000
|
$3,18,000
|
$2,44,000
|
$8,20,000
|
Workings:
|
|
January (actual)
|
February (actual)
|
March (actual)
|
April
|
May
|
June
|
July
|
August
|
September
|
|
Purchase Costs
|
$17,600
|
$1,26,400
|
$2,00,000
|
$3,16,000
|
$3,20,000
|
$1,68,000
|
$1,16,800
|
$1,07,200
|
$60,000
|
|
50% paid in purchase month
|
$8,800
|
$63,200
|
$1,00,000
|
$1,58,000
|
$1,60,000
|
$84,000
|
$58,400
|
$53,600
|
$30,000
|
|
50% paid in following month
|
|
$8,800
|
$63,200
|
$1,00,000
|
$1,58,000
|
$1,60,000
|
$84,000
|
$58,400
|
$53,600
|
|
Total Cash Disbursements
|
$8,800
|
$72,000
|
$1,63,200
|
$2,58,000
|
$3,18,000
|
$2,44,000
|
$1,42,400
|
$1,12,000
|
$83,600
|
Cash Budget
|
Cash Budget
|
April
|
May
|
June
|
Total
|
|
Receipts:
|
|
|
|
|
|
Collection from customers
|
$4,36,000
|
$6,95,000
|
$8,65,000
|
$19,96,000
|
|
Borrowings
|
$1,70,000
|
$10,000
|
|
$1,80,000
|
|
Total Receipts
|
$6,06,000
|
$7,05,000
|
$8,65,000
|
$21,76,000
|
|
Disbursements:
|
|
|
|
|
|
Payment for merchandise
|
$2,58,000
|
$3,18,000
|
$2,44,000
|
$8,20,000
|
|
Payment for Sale commission
|
$26,000
|
$40,000
|
$20,000
|
$86,000
|
|
Advertising payment
|
$2,00,000
|
$2,00,000
|
$2,00,000
|
$6,00,000
|
|
Payment for rent
|
$18,000
|
$18,000
|
$18,000
|
$54,000
|
|
Payment for wages and salaries
|
$1,06,000
|
$1,06,000
|
$1,06,000
|
$3,18,000
|
|
Payment for utilities
|
$7,000
|
$7,000
|
$7,000
|
$21,000
|
|
Payment for New Equipment
|
|
$16,000
|
$40,000
|
$56,000
|
|
Payment of dividend
|
$15,000
|
|
|
$15,000
|
|
Repayment of borrowings
|
|
|
$1,80,000
|
$1,80,000
|
|
Repayment of interest on borrowings
|
|
|
$3,500
|
$3,500
|
|
Total Disbursements
|
$6,30,000
|
$7,05,000
|
$8,18,500
|
$21,53,500
|
|
Change in cash
|
($24,000)
|
$0
|
$46,500
|
$22,500
|
|
Opening Balance
|
$74,000
|
$50,000
|
$50,000
|
$74,000
|
|
Closing Balance
|
$50,000
|
$50,000
|
$96,500
|
$96,500
|
Budgeted Income Statement
|
Budgeted Income Statement
|
|
For First Quarter Ending June 30
|
|
Sales Revenue
|
$21,50,000
|
|
Less: Variable Costs
|
|
|
Cost of sales
|
$8,60,000
|
|
Sales commissions
|
$86,000
|
|
Total Variable costs
|
$9,46,000
|
|
Contribution
|
$12,04,000
|
|
Less: Fixed Costs
|
|
|
Advertising
|
$6,00,000
|
|
Rent
|
$54,000
|
|
Wages and salaries
|
$3,18,000
|
|
Utilities
|
$21,000
|
|
Insurance
|
$9,000
|
|
Depreciation
|
$42,000
|
|
Total Fixed costs
|
$10,44,000
|
|
Income
|
$1,60,000
|
Budgeted Income Statement
|
Budgeted Balance Sheet
|
|
As on 30 June
|
|
Assets
|
|
Cash
|
$96,500
|
|
Accounts receivable
|
$5,00,000
|
|
Inventory**
|
$48,000
|
|
Prepaid insurance
|
$12,000
|
|
Fixed assets, net of depreciation
|
$9,64,000
|
|
Total assets
|
$16,20,500
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
Accounts payable
|
$84,000
|
|
Dividends payable
|
$15,000
|
|
Common shares
|
$8,00,000
|
|
Retained earnings
|
$7,21,500
|
|
Total liabilities and shareholders' equity
|
$16,20,500
|
Workings:
|
Workings:
|
|
|
Outstanding accounts receivable for May
|
$1,00,000
|
|
Outstanding accounts receivable for June
|
$4,00,000
|
|
Total Accounts receivable
|
$5,00,000
|
|
|
|
Outstanding accounts payable for June
|
$84,000
|
|
|
|
|
|
Retained Earnings
|
|
|
Opening balance
|
$5,80,000
|
|
Add: Income during first quarter
|
$1,56,500
|
|
Less: Dividend
|
$15,000
|
|
Closing Balance
|
$7,21,500
|
Recommendation
The above discussion and calculation reflect Perfect Stitch Replica's Limited is efficient to manage its cash flows, but there is a need to manage the cash flows appropriately. In April month, there is a need to borrow $170,000 for maintaining minimum ending cash balance of $50,000. In May month, the company further needs to borrow $10,000 to maintain a minimum balance. However, in June, the company is able to generate sufficient cash from its sales revenue via collections from the accounts receivables because the company is efficient to repay all the borrowings taken in April and May with the interest by keeping higher ending cash balance than the required minimum balance. Therefore, the company is able to manage its liquidity by borrowings in the first two months in the first quarter.
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