ACCT504 Sample Case Study 3 on Cash Budgeting Solution

It is recommended that you share this solution file in Doc Sharing by the end of Week 5 with your students.

The Cambridge Company has budgeted sales revenues as follows.

Jan Feb MarCredit sales$45,000$36,000$27,000Cash sales 27,000 76,500 58,500Total sales$72,000$112,500$85,500

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.

Purchases of inventory are all on credit and 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $97,500 in January, $67,500 in February, and $31,500 in March.

Other budgeted cash receipts: (a) sale of plant assets for $18,525 in February, and (b) sale of new common stock for $25,275 in March. Other budgeted cash disbursements: (a) operating expenses of $10,125 each month, (b) selling and administrative expenses of $18,750 each month, (c) dividends of $28,500 will be paid in February, and (d) purchase of equipment for $9,000 cash in March.

The company has a cash balance of $15,000 at the beginning of February and wishes to maintain a minimum cash balance of $15,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of February 1.

Requirements:

1. Use this information to prepare a cash budget for the months of February and March using the template provided in Doc Sharing.

ACCT 504 Sample Case Study 3 On Cash Budgeting Solution

1.CAMBRIDGE COMPANYCash BudgetFor the 2 Months of February and March

Feb MarBeginning cash balance$15,000$15,000Add:ReceiptsCollections from customers 39,60030,600Sale of plant assets18,525Sale of new common stock25,275Cash sales 76,500 58,500Total receipts 134,625 114,375Total available cash 149,625 129,375Less: DisbursementsPurchases of inventory85,50053,100Operating expenses10,12510,125Selling and administrative expenses18,75018,750Dividends28,500Equipment purchase 9,000Total disbursements 142,875 90,975Excess (deficiency) of available cash over disbursements6,75038,400FinancingBorrowings8,250Repayments (8,415)*Ending cash balance$15,000$29,985

*8,250 12% 2/12 = $165 + $8,250 = $8,415

Schedule of Expected Collections From Customers

Credit sales Feb MarJan (45,000 40%)$18,000Feb ($36,000 x 60%), Mar ($36,000 x 40%)21,600$ 14,400Mar ($27,000 60%) 16,200Total collections$39,600$30,600

Schedule of Expected Payments for Purchase of Inventory

Inventory purchases Feb MarJan ($97,500 x 60%)$58,500Feb ($67,500 x 40%), Mar ($67,500 x 60%)27,000$40,500Mar ($31,500 x 40%) 12,600Total payments$85,500$53,100