Chapter 21, Problem 1R

On January 1, Sweet Pleasures, Inc., begins business. The company has $14,000 cash on hand and is attempting to project cash receipts and disbursements through April 30. On May 1, a note payable of $10,000 will be due. This amount was borrowed on January 1 to carry the company through its first four months of operation.

The unit purchase cost of the company’s single product, a box of Sweet Pleasures chocolates, is $12. The unit sales price is $28. Projected purchases and sales in units for the first four months are:

Sales terms call for a 5% discount if paid within the same month that the sale occurred. It is expected that 50% of the billings will be collected within the discount period, 25% by the end of the month after purchase, 19% in the following month, and 6% will be uncollectible.

Approximately 60% of the purchases are paid for in the month purchased. The rest are due and payable in the next month.

Total fixed marketing and administrative expenses for each month include cash expenses of $5,000 and depreciation on equipment of $2,000. Variable marketing and administrative expenses total $6 per unit sold. All marketing and administrative expenses are paid as incurred.

REQUIREMENT

You have been asked to prepare a cash budget for the next four months to see if the loan can be repaid. Review the worksheet CASHBUD that follows these requirements. The problem data have already been entered in the Data Section of the worksheet.

To determine

Prepare a cash budget for the four months.

Explanation of Solution

Given data,

Figure (1)

Prepare a cash budget:

Figure (2)