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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition

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Chapter 9, Problem 61E
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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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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:

Chapter 9, Problem 61E, Cash Budget The owner of a building supply company has requested a cash budget for June. After

  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?

1.

To determine

Present a cash budget.

Explanation

Cash Budget:

Cash budget is a financial budget. It is prepared to assess inflows and outflows of cash to manage cash balance and timing related issues. Closing cash balance is computed by adding cash receipts and subtracting cash payments from the expected cash available in the beginning.

Cash budget is presented as follows:

ParticularsAmount ($)
Opening cash736
Add: Cash receipts 156,596
Less: Cash payments 259,059
Closing cash(1,727)

Table (1)

Working Notes:

1. Computation of Cash receipts:

ParticularsAmount ($)
Add: Cash sales 18,600
Add: Cash collected from credit sales of the month ($54,000×40%)21,600
Add: Cash collected from credit sales of the preceding month ($35,000×30%)10,500

Add: Cash collected from credit sales of the month preceding the preceding month (A)

($28,900×20%)

5,780
Add: Late fee (A×2%)116
Total receipts56,596

Table (2)

2. Computation of Cash payments:

ParticularsAmount ($)
Salaries and wages11,750
Rent4,100
Taxes6,780
Material expenses paid for sales of May 327,136
Material expenses paid for sales of June 49,293
Total Cash payments59,059

Table (3)

Operating expenses are adjusted to reduce non-cash expenses like depreciation and prepaid expenses

2.

To determine

Provide recommendations to deal with the negative cash balance of the company in case line of credit is not available to the company.

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