Chapter 6, Problem 6.45P

Cash budget. (Continuation of 6-44) (Appendix)

Refer to the information in Problem 6-44.

All purchases made in a given month are paid for in the following month, and direct material purchases make up all of the accounts payable balance and are reflected in the accounts payable balances at the beginning and the end of the year.

Sales are made to customers with terms net 45 days. Fifty percent of a month’s sales are collected in the month of the sale, 25% are collected in the month following the sale, and 25% are collected two months after the sale and are reflected in the accounts receivables balances at the beginning and the end of the year. Direct manufacturing labor, variable manufacturing overhead and variable marketing costs are paid as they are incurred. Fifty percent of fixed manufacturing overhead costs, 60% of fixed marketing costs, and 100% of fixed distribution costs are depreciation expenses. The remaining fixed manufacturing overhead and marketing costs are paid as they are incurred.

Selected balances for December 31, 2017, follow:

Cash	$29,200
Accounts payable	21,450
Accounts receivable	40,000

Selected budget information for December 2018 follows:

Accounts payable	$27,770
Accounts receivable	48,500

Hazlett has budgeted to purchase equipment costing $145,000 for cash during 2018. Hazlett desires a minimum cash balance of $25,000. The company has a line of credit from which it may borrow in increments of $1,000 at an interest rate of 12% per year. By special arrangement, with the bank, Hazlett pays interest when repaying the principal, which only needs to be repaid in 2019.

1. 1. Prepare a cash budget for 2018. If Hazlett must borrow cash to meet its desired ending cash balance, show the amount that must be borrowed.
2. 2. Does the cash budget for 2018 give Hazlett’s managers all of the information necessary to manage cash in 2018? How might that be improved?
3. 3. What insight does the cash budget give to Hazlett’s managers that the budgeted income statement does not?