27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cash budget

 The controller of Sonoma Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

  May June July
Sales $86.000 $90,000 $95,000
Manufacturing costs 34,000 39,000 44,000
Selling and administrative expenses 15,000 16,000 22,000
Capital expenditures 80,000

 The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month following the sale and the remainder the following month (second month following sale). Depreciation, insurance, and property tax expense represent $3,500 of the estimated monthly manufacturing costs. The annual insurance premium is paid in September, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month.

 Current assets as of May 1 include cash of $33,000, marketable securities of $40,000, and accounts receivable of $90,000 ($72,000 from April sales and $18,000 from March sales). Sales on account for March and April were $60,000 and $72,000, respectively. Current liabilities as of May 1 include $6,000 of accounts payable incurred in April for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $14,000 will be made in June. Sonoma's regular quarterly dividend of $5,000 is expected to be declared in June and paid in July. Management wants to maintain a minimum cash balance of $30,000.


  1. 1. Prepare a monthly cash budget and supporting schedules for May, June, and July.
  2. 2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?


To determine

Cash budget is a budget that is prepared to estimate the cash inflows and cash outflows for a particular period of time. It is used to find out whether adequate cash required for business operations is available with the company. It includes cash receipts, cash payments, and short-term financing. It excludes non-cash transactions such as depreciation expense, conversion of bonds to other type of assets, and exchange of non-cash assets for only non-cash assets.

To Prepare: The cash budget for May, June, and July.


The following table shows the cash budget for May, June, and July.

Figure (1)

Working Note:

Compute the collection of accounts receivable.

Details May ($) June ($) July ($)
March Sales


($60,000 × 30%)

April Sales


($72,000 × 70%)



To determine

To Explain: The recommendation that should be made to the controller on the basis of the cash budget prepared above.

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