Chapter 10, Problem 57P

1.

To determine

Prepare a cash budget for the health club, T-F, a not not-for-profit family-oriented health club for the year 2018.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

A cash budget illustrates the effects of all budgeted activities on cash. The cash budget draws data from nearly every part of the master budget. Preparing a cash budget requires that all budgets be carefully reviewed to recognize all revenues, expenses, and other cash-influencing operations. It includes three major sections which are as follows:

• Net cash flows from operating activities;
• Net cash flows from investing activities; and
• Net cash flows from financing activities

The cash budget will provide data to the user related to the company's cash management capability.

The budget for cash receipts provides details of anticipated cash collections from operations for a coming period. Cash receipts from investment and fundraising activities are shown on the cash budget elsewhere. It has three different sources of cash receipts from operations:

• Cash sales,
• Bank credit card sales, and
• Collection of credit sales (i.e., sales made by the company on “open account”).

The cash budget for the health club, T-F, a not not-for-profit family-oriented health club for the year 2018 is shown below:

T-F HEALTH CLUBCash BudgetFor the Year Ending October 31, 2018
		2017		Price Growth		Increase		2018
Operating Cash Inflows:
Annual membership fees		$355,000		3.0%		10.0%		$402,215
Lesson and class fees		234,000		30.00%				304,200
Miscellaneous		2,000		33.33%				2,667
Total Operating Cash Inflows		$591,000						$709,082
Operating Cash Outflows:
Manager’s salary and benefits		$36,000				15.00%		$41,400
Employee wages and benefits:
Regular employees		190,000				15.00%		218,500
Lesson and class employees		195,000		30.00%		15.00%		291,525
Towels and supplies		16,000				25.00%		20,000
Utilities (heat and lights)		22,000				25.00%		27,500
Miscellaneous		2,000				25.00%		2,500
Payoff of outstanding A/P		N/A				given		2,500
Total Operating Cash Outflows		$461,000						$603,925
Net Operating Cash Flow		$130,000						$105,157
Non-Operating Cash Outflows:
Payoff of equipment payable						given		$15,000
Mortgage principal						given		30,000
Mortgage interest								32,400
Planned equipment purchases						given		25,000
Total Non-Operating Cash Outflow								$102,400
Net Cash Flow								$2,757
Beginning Cash Balance (given)								7,300
Budgeted Ending Cash Balance								$10,057

2.

To determine

Mention the financial issues that will be revealed by the health club's cash budget, T-F, a family-oriented health club that is not for profit.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

A cash budget illustrates the effects of all budgeted activities on cash. The cash budget draws data from nearly every part of the master budget. Preparing a cash budget requires that all budgets be carefully reviewed to recognize all revenues, expenses, and other cash-influencing operations. It includes three major sections which are as follows:

• Net cash flows from operating activities;
• Net cash flows from investing activities; and
• Net cash flows from financing activities

The cash budget will provide data to the user related to the company's cash management capability.

The budget for cash receipts provides details of anticipated cash collections from operations for a coming period. Cash receipts from investment and fundraising activities are shown on the cash budget elsewhere. It has three different sources of cash receipts from operations:

• Cash sales,
• Bank credit card sales, and
• Collection of credit sales (i.e., sales made by the company on “open account”).

The following are the operational issues which the T-F, a family-oriented health club will experience:

• The cash contribution from lessons and classes will decline as the estimated salary rise for lesson and class workers is considerably higher than the expected sales rises (i.e., in additional volume). Last year, $39,000 ($234,000 – $195,000) was the cash generated from those activities. The projection for 2018 is just $12,675 ($304,200 − $291,525).
• Operating costs increase faster than membership fee revenues. The cash produced from routine operations last year (2017) was $91,000 [($355,000 + $2,000) – ($461,000 – $195,000)]. The forecast for 2015 is just $92,482 [($402,215 + $2,667) − ($603,925-$ 291,525)]. The rise in cash from daily activities is estimated to be about 4%, although such sales are projected to increase by 13%.
• T-F Health Club appears to get an issue with cash management. The club is not producing enough cash from the activities to meet its financial obligations. Unless the pattern persists, it may not be able to reach expenses for regular operations. The club will plan monthly cash budgets to assist with cash management in order to prevent cash crises.
• It is estimated that non-operational expenditures would use nearly all the cash generated from operations. Given the recent drop in mortgage interest rates, management may consider refinancing this debt in order to reduce the cash drain.

3.

To determine

Mention that the individual, JC's concern about the board’s goals will be justified unrealistically or not, clarify.

Explanation of Solution

A budget is an estimate for the takeover and use of financial and other resources, for example, a year, a month or a quarter, over a specified period of time. Budgeting is a method of having one or more budgets prepared. Budgeting is the method of drawing up a budget or more.

Non-profit organizations are privately held corporations that do not provide financial benefits to their members or creditors and are formed for public or mutual benefit other than to generate profits for shareholders or investors whereas a business enterprise is a for-profit entity associated with the production, selling or distribution of goods or services.

A cash budget illustrates the effects of all budgeted activities on cash. The cash budget draws data from nearly every part of the master budget. Preparing a cash budget requires that all budgets be carefully reviewed to recognize all revenues, expenses, and other cash-influencing operations. It includes three major sections which are as follows:

• Net cash flows from operating activities;
• Net cash flows from investing activities; and
• Net cash flows from financing activities

The cash budget will provide data to the user related to the company's cash management capability.

The budget for cash receipts provides details of anticipated cash collections from operations for a coming period. Cash receipts from investment and fundraising activities are shown on the cash budget elsewhere. It has three different sources of cash receipts from operations:

• Cash sales,
• Bank credit card sales, and
• Collection of credit sales (i.e., sales made by the company on “open account”).

The concern of person, JC about the Board’s growth goals is warranted. Budget forecasts for 2018 indicate only a small improvement in the cash balance (i.e., a rise of just $2,757).

The estimated cash available is well short of the additional $60,000 in annual cash required to buy land. If the board wants to buy the adjacent land, it may have to accept fee increases, refinancing current debt, or other means of funding the transaction (such as new mortgage debt or membership bonds).