Philip Spencer of the Spencer Corporation wants you to forecast the firm's financing needs over the fourth quarter (October through December). He has made the following observations relative to planned cash receipts and disbursements: Interest on a $75,000 bank note (principal due next March) at an 8 percent annual rate is payable in December for the three-month period just ended. The firm follows a policy of paying no cash dividends. Actual historical and future predicted sales are as follows: Historical Sales Predicted Sales August $150,000 October $200,000 September $175,000 November $220,000 December $180,000 January $200,000 The firm has a monthly rental expense of $5,000. Wages and salaries for the coming months are estimated at $25,000 per month. Of the firm's sales, 25 percent is collected in the month of the sale, 35 percent one month after the sale, and the remaining 40 percent two months after the sale. Merchandise is purchased one month before the sales month and is paid for in the month it is sold. Purchases equal 75 percent of sales. Tax prepayments are made quarterly, with a prepayment of $10,000 in October based on earnings for the quarter ended September 30. Utility costs for the firm average 3 percent of sales and are paid in the month they are incurred. Depreciation expense is $20,000 annually. Using the information provided in Situation 2, prepare a monthly cash budget for the three-month period ending in December.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Philip Spencer of the Spencer Corporation wants you to forecast the firm's financing needs over the fourth quarter (October through December). He has made the following observations relative to planned cash receipts and disbursements:

Interest on a $75,000 bank note (principal due next March) at an 8 percent annual rate is payable in December for the three-month period just ended.
The firm follows a policy of paying no cash dividends.
Actual historical and future predicted sales are as follows:

Historical Sales	Predicted Sales
August	$150,000	October	$200,000
September	$175,000	November	$220,000
		December	$180,000
		January	$200,000

The firm has a monthly rental expense of $5,000.
Wages and salaries for the coming months are estimated at $25,000 per month.
Of the firm's sales, 25 percent is collected in the month of the sale, 35 percent one month after the sale, and the remaining 40 percent two months after the sale.
Merchandise is purchased one month before the sales month and is paid for in the month it is sold. Purchases equal 75 percent of sales.
Tax prepayments are made quarterly, with a prepayment of $10,000 in October based on earnings for the quarter ended September 30.
Utility costs for the firm average 3 percent of sales and are paid in the month they are incurred.
Depreciation expense is $20,000 annually.

Using the information provided in Situation 2, prepare a monthly cash budget for the three-month period ending in December.

Definition Definition Estimate of an organization's cash flow for a future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future.

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