Textbook Problem

Cash Budget

The owner of a building supply company has requested a cash budget for June. After examining the records of the company, you find the following:

1. a. Cash balance on June 1 is $736.
2. b. Actual sales for April and May are as follows:

1. c. Credit sales are collected over a 3-month period: 40% in the month of sale, 30% in the second month, and 20% in the third month. The sales collected in the third month are subject to a 2% late fee, which is paid by those customers in addition to what they owe.

   The remaining sales are uncollectible.

2. d. Inventory purchases average 64% of a month’s total sales. Of those purchases, 20% are paid for in the month of purchase. The remaining 80% are paid for in the following month.
3. e. Salaries and wages total $11,750 per month, including a $4,500 salary paid to the owner.
4. f. Rent is $4,100 per month.
5. g. Taxes to be paid in June are $6,780.

The owner also tells you that he expects cash sales of $18,600 and credit sales of $54,000 for June. No minimum cash balance is required. The owner of the company doesn’t have access to short-term loans.

Required:

1. 1. Prepare a cash budget for June. Include supporting schedules for cash collections and cash payments. (Round all amounts to the nearest dollar.)
2. 2. CONCEPTUAL CONNECTION Did the business show a negative cash balance for June? Suppose that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for dealing with a negative cash balance?