Question 2 – Cash Management

2. In preparation for the quarterly cash budget, the following revenue and cost information have been compiled. Prepare and evaluate a cash budget for the months of October, November, and December based on the information shown below.

Month | Sales | Purchases |

August (actual) | $3,000,000 | $3,500,000 |

September (actual) | $4,500,000 | $2,000,000 |

October (forecast) | $1,000,000 | $ 500,000 |

November (forecast) | $1,500,000 | $ 750,000 |

December (forecast) | $2,000,000 | $1,000,000 |

The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.

Interest income of $50,000 on marketable securities will be received in December.

The firm pays cash for 40 percent of its purchases.

The firm pays for 60 percent of its purchases the following month.

Salaries and wages amount to 15 percent of the preceding month’s sales.

Sales commissions amount to 2 percent of the preceding month’s sales.

Lease payments of $100,000 must be made each month.

A principal and interest payment on an outstanding loan is due in December of $150,000.

The firm pays dividends of $50,000 at the end of the quarter.

Fixed assets costing $600,000 will be purchased in December.

Depreciation expense each month of $45,000.

The firm has a beginning cash balance in October of $100,000 and maintains a minimum cash balance of $200,000.

Answer:

Cash Budget |

Month | August | September | October | November | December |

Sales | $3,000,000 | 4,500,000 | 1,000,000 | 1,500,000 | 2,000,000 |

Cash (60%) | 1,800,000 | 2,700,000 | 600,000 | 900,000 | 1,200,000 |

1 mo. (40%) | | 1,200,000 | 1,800,000 | 400,000 | 600,000 |

Interest | | | | | 50,000 |

Total Receipts | | 3,900,000 | 2,400,000 | 1,300,000 | 1,850,000 |

Purchase | 3,500,000 | 2,000,000 | 500,000 | 750,000 | 1,000,000 |

Cash(40%) | 1,400,000 | 800,000 | 200,000 | 300,000 | 400,000 |

1 mo.(60%) | | 2,100,000 | 1,200,000 | 300,000 | 450,000 |

Salaries &...