Chapter 9, Problem 77C

1.

To determine

Prepare cash budget.

Explanation of Solution

Cash Budget:

Cash budget is a financial budget. It is prepared to assess inflows and outflows of cash to manage cash balance and timing related issues. Closing cash balance is computed by adding cash receipts and subtracting cash payments from the expected cash available in the beginning.

Cash budget is presented as follows:

Particulars	Amount ($)
Opening cash	0
Add: Cash receipts 1	21,360
Less: Cash payments 2	23,964
Closing cash	$\left(2,604\right)$

Table (1)

Working Notes:

1. Computation of Cash receipts:

Particulars	Amount ($)
Fillings	$\left(50\times 90\right)$ 4,500
Crowns	$\left(300\times 19\right)$ 5,700
Root canals	$\left(170\times 8\right)$ 1,360
Bridges	$\left(500\times 7\right)$ 3,500
Extractions	$\left(45\times 30\right)$ 1,350
Cleaning	$\left(25\times 108\right)$ 2,700
X-Rays	$\left(15\times 150\right)$ 2,250
Total receipts	21,360

Table (2)

2. Computation of Cash payments:

Particulars	Amount ($)
Salary to dental assistants	1,900
Receptionist salary	1,500
Hygienist salary	1,800
Public relations management	1,000
Personal salary	6,500
Benefits	1,344
Building lease	1,500
Dental supplies	1,200
Janitorial	300
Utilities	400
Phone	150
Office supplies	100
Lab fees	5,000
Loan payments	570
Interest payments	500
Miscellaneous	200
Total	23,964

Table (3)

2.

To determine

Explain steps that can be taken to solve financial problems of the company. Present a cash budget reflecting the steps taken. Also, explain whether these steps would likely be followed. Further, explain whether the behavioral principals relating to budgets and plans, have a role in the given situation.

Explanation of Solution

Steps that could be taken to solve financial problems are listed as follows:

• Elimination of public relation personnel’s salary.
• Increase in working hours of the premise up to 40 hours a week.
• Timings should be adjusted to suit office timings of the patients.
• Lease rent paid to self should be eliminated.

Role of budgets and planning in the current set up:

• Working lesser hours than required while the company is incurring negative cash flows and outstanding debts indicate lack of planning.
• Maintaining public relations is although a good practice; however, this should be done by owners without charging cost considering the present situation of the company.
• Timings do not suit people who go to office and may want to visit dentist after office hours or on weekends. This indicates lack of analysis of demand for services.

It is likely that the suggestions would be followed; since, the internal revenue service is threatening to impound business and sell its assets. Company has incurred debt which is difficult to repay and is having negative cash flows.

Cash budget after incorporating above suggestions is presented as follows:

Particulars	Amount ($)
Opening cash	0
Add: Cash receipts 3	26,700
Less: Cash payments 4	21,202
Closing cash	5,498

Table (4)

Working Notes:

3. Computation of Cash receipts:

Particulars	Amount ($)
Total receipts (Sub Part-1)	21,360
Current hours	$\left(32\times 4\right)$ 128
Proposed hours	$\left(40\times 4\right)$ 160
Total receipts expected	$\left(21,360\times \frac{160}{128}\right)$ 26,700

Table (5)

4. Computation of Cash payments:

Particulars	Working ($)	Amount ($)
Salary to dental assistants		1,900
Receptionist salary	$\left(1,500\times \frac{160}{128}\right)$	1,875
Hygienist salary	$\left(1,800\times \frac{160}{128}\right)$	2,250
Public relations management		0
Personal salary	$\left(6,500\times 75\%\right)$	4,875
Benefits		1,344
Building lease		0
Dental supplies	$\left(1,200\times \frac{160}{128}\right)$	1,500
Janitorial	$\left(300\times \frac{160}{128}\right)$	375
Utilities	$\left(400\times \frac{160}{128}\right)$	500
Phone	$\left(150\times \frac{160}{128}\right)$	188
Office supplies	$\left(100\times \frac{160}{128}\right)$	125
Lab fees		5,000
Loan payments		570
Interest payments		500
Miscellaneous		200
Total		21,202

Table (6)

Salary of dental assistants are not increased since, they are not fully utilized.

Variable costs are increased with increase in the working hours of the company.