27th Edition
WARREN + 5 others
ISBN: 9781337272094




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

Cash budget

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

  June July August
Sales $160,000 $185,000 $200,000
Manufacturing costs 66,000 82,000 105,000
Selling and administrative expenses 40,000 46,000 51,000
Capital expenditures 120,000

 The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainder the following month (second month after sale). Depreciation, insurance, and property tax expense represent $12,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in February, 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 June 1 include cash of $42,000, marketable securities of $25,000, and accounts receivable of $198,000 ($150,000 from May sales and $48,000 from April sales). Sales on account in April and May were $120,000 and $150,000, respectively. Current liabilities as of June 1 include $13,000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimated income tax payment of $24,000 will be made in July. Mercury Shoes' regular quarterly dividend of $15,000 is expected to be declared in July and paid in August. Management wants to maintain a minimum cash balance of $40,000.


  1. 1. Prepare a monthly cash budget and supporting schedules for June, July, and August.
    1. 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 June ($) July ($) August ($)
March Sales


($120,000 × 40%)

April Sales


($150,000 × 60%)



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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