Chapter 23, Problem 3AP

To determine

Prepare a cash budget of Company B for the month of November with the help of cash collections on accounts receivable schedule, and cash payments for purchase of merchandise schedule.

Answer to Problem 3AP

Company B
Cash Budget
For the Month Ended November 30
Particulars	$	$
Cash balance at beginning of month		29,600
Add: Receipts
Collections on receivables ( refer Schedule A – Table 2)	778,800
Sale of fully depreciated equipment	8,400	787,200
Total cash available		816,800
Less: Payments
Payments for purchases of merchandise (refer Schedule B – Table 3)	486,500
Payments on operating expenses (10)	185,000
Payment on note payable	98,500	770,000
Cash balance at end of month		46,800

Table (1)

Therefore, the cash balance at the end of the November is $46,800.

Explanation of Solution

Budget:

Budget is an effective tool to achieve the financial and operational goals of the business. Budget is the key element of the financial planning and it assists managers to control the business cost. Management should set the budgeted amount at reasonable and achievable levels.

Prepare the schedule of cash collections on accounts receivable, and cash payments for purchases of merchandise as follows:

Schedule A:

Schedule A—Collections on Receivables in November	$
September sales (1)	30,800
October sales (2)	132,000
November sales (3)	616,000
Total collections on receivables	778,800

Table (2)

Schedule B:

Schedule B—Payments for Purchases of Merchandise	$
On October purchases (8)	217,000
On November purchases (9)	269,500
Total payments for purchases of merchandise	486,500

Table (3)

Working note:

Calculate the cash received from the September sales

$\begin{array}{c}\begin{array}{l}\text{Cash received from}\\ \text{ the September sales}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number units sold during the September month}\times \\ \text{Sales price per unit}\times \\ 7\text{ percent in the second month following the sales}\end{array}\right]\\ =40,000\text{ units}\times \text{\$11 per unit}\times \frac{7}{100}\\ =\$30,800\end{array}$ (1)

Calculate the cash received from the October sales

$\begin{array}{c}\begin{array}{l}\text{Cash received from}\\ \text{ the October sales}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number units sold during the September month}\times \\ \text{Sales price per unit}\times \\ \text{20 percent in the following month the sales}\end{array}\right]\\ =60,000\text{ units}\times \text{\$11 per unit}\times \frac{20}{100}\\ =\$132,000\end{array}$ (2)

Calculate the cash received from the November sales

$\begin{array}{c}\begin{array}{l}\text{Cash received from}\\ \text{ the November sales}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Number units sold during the November month}\times \\ \text{Sales price per unit}\times \\ \text{20 percent in the current (November) month sales}\end{array}\right]\\ =80,000\text{ units}\times \text{\$11 per unit}\times \frac{70}{100}\\ =\$616,000\end{array}$ (3)

Calculate the inventory (units) at the end of the September

$\begin{array}{c}\begin{array}{l}\text{Inventory at the}\\ \text{ end of the September }\end{array}\}\text{= }\left[\begin{array}{l}\text{Fixed units maintained in the each month +}\\ \left(\text{The number of units sold in the following month}\times \text{10 percent}\right)\end{array}\right]\\ =2,000\text{ units + }\left(60,000\text{ units }\times \frac{10}{100}\right)\\ =2,000\text{ units + 6,000 units}\\ \text{=8,000 units}\end{array}$ (4)

Calculate the inventory (units) at the end of the October

$\begin{array}{c}\begin{array}{l}\text{Inventory at the}\\ \text{ end of the October }\end{array}\}\text{= }\left[\begin{array}{l}\text{Fixed units maintained in the each month +}\\ \left(\text{The number of units sold in the following month }\times \text{10 percent}\right)\end{array}\right]\\ =2,000\text{ units + }\left(80,000\text{ units }\times \frac{10}{100}\right)\\ =2,000\text{ units + 8,000 units}\\ \text{=10,000 units}\end{array}$ (5)

Calculate the inventory (units) at the end of the November

$\begin{array}{c}\begin{array}{l}\text{Inventory at the}\\ \text{ end of the November }\end{array}\}\text{= }\left[\begin{array}{l}\text{Fixed units maintained in the each month +}\\ \left(\text{The number of units sold in the following month }\times \text{10 percent}\right)\end{array}\right]\\ =2,000\text{ units + }\left(50,000\text{ units }\times \frac{10}{100}\right)\\ =2,000\text{ units + 5,000 units}\\ \text{=7,000 units}\end{array}$ (6)

Calculate the number of units purchased and cost of purchase for the each months

Particulars	Units (A)	Cost of per unit (B)	Purchases $\text{C =}\left(\text{A×B}\right)$
Inventory at end of September (4)	8,000
Add: Purchases in October $\left(60,000+10,000(5)-8,000\right)$	62,000	$7	$434,000
Available for sale in October	70,000
Less: Sales in October	60,000
Inventory at end of October	10,000
Add: Purchases in November $\left(80,000+7,000(6)-10,000\right)$	77,000	$7	$539,000
Available for sale in November	87,000
Less: Sales in November (estimated)	80,000
Inventory at end of November	7,000

Table (4)

(7)

Calculate the cash paid for the merchandise purchase for the month October

$\begin{array}{c}\begin{array}{l}\text{Cash paid for the merchandise}\\ \text{ purchase for the month October}\end{array}\}=\left[\begin{array}{l}\text{Purchase in the month of October }\times \\ \left(\begin{array}{l}\text{50 percent of th purcahse in the given month }\\ \text{are paid in the following month}\end{array}\right)\end{array}\right]\\ =\$434,000\times \frac{50}{100}\\ =\$217,000\end{array}$ (8)

Calculate the cash paid for the merchandise purchase for the month November

$\begin{array}{c}\begin{array}{l}\text{Cash paid for the merchandise}\\ \text{ purchase for the month November}\end{array}\}=\left[\begin{array}{l}\text{Purchase in the month of November }\times \\ \left(\text{50 percent of th purcahse in the given month }\right)\end{array}\right]\\ =\$539,000\times \frac{50}{100}\\ =\$269,500\end{array}$ (9)

Calculate the operating expense under cash budget

$\begin{array}{c}\text{Operating expense =}\left(\begin{array}{l}\text{ Budgeted operating expense }-\\ \text{Depreciation expense}\end{array}\right)\\ =\$220,000-\$35,000\\ =\$185,000\end{array}$ (10)