ACCT504 Sample Case Study 3 on Cash Budgeting Solution

It is recommended that you share this solution file in Doc Sharing by the end of Week 5 with your students. The Cambridge Company has budgeted sales revenues as follows. Jan $45,000 27,000 $72,000 Feb $36,000 76,500 $112,500 Mar $27,000 58,500 $85,500

Credit sales Cash sales Total sales

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $97,500 in January, $67,500 in February, and $31,500 in March. Other budgeted cash receipts: (a) sale of plant assets for $18,525 in February, and (b) sale of new common stock for $25,275 in March. Other budgeted cash disbursements: (a) operating expenses of $10,125 each month, (b) selling and administrative expenses of $18,750 each month, (c) dividends of $28,500 will be paid in February, and (d) purchase of equipment for $9,000 cash in March. The company has a cash balance of $15,000 at the beginning of February and wishes to maintain a minimum cash balance of $15,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of February 1. Requirements: 1. Use this information to prepare a cash budget for the months of February and March using the template provided in Doc Sharing.

ACCT 504 Sample Case Study 3 On Cash Budgeting Solution 1. CAMBRIDGE COMPANY Cash Budget For the 2 Months of February and March Feb $15,000 39,600 18,525 76,500 134,625 149,625 85,500 10,125 18,750 28,500 142,875 6,750 8,250 $15,000 (8,415)* $29,985 Mar $15,000 30,600 25,275 58,500 114,375 129,375 53,100 10,125 18,750 9,000 90,975 38,400

Beginning cash balance Add: Receipts Collections from customers Sale of plant assets Sale of new common stock Cash sales Total receipts Total available cash Less: Disbursements Purchases of inventory Operating expenses Selling and administrative expenses Dividends Equipment purchase Total disbursements Excess (deficiency) of available cash over disbursements Financing Borrowings Repayments Ending cash balance *8,250 12% 2/12 = $165 + $8,250 = $8,415

Schedule of Expected Collections From Customers Credit sales Jan (45,000 40%) Feb ($36,000 x 60%), Mar ($36,000 x 40%) Mar ($27,000 60%) Total collections Feb $18,000 21,600 $39,600 Mar $ 14,400 16,200 $30,600

Schedule of Expected Payments for Purchase of Inventory Inventory purchases Jan ($97,500 x 60%) Feb ($67,500 x 40%), Mar ($67,500 x 60%) Mar ($31,500 x 40%) Total payments Feb $58,500 27,000 $85,500 Mar $40,500 12,600 $53,100