Problem 9-70 Understanding Relationships, Cash Budget, Pro Forma Balance Sheet
Sales:
Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of the year:
a.
May (actual)
June (actual)
July (estimated)
August (estimated)
September (estimated)
October (estimated)
b.
$100,000
120,000
90,000
100,000
135,000
110,000
Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale.
c.
d.
e.
Each month, the ending inventory exactly equals 50% of the cost of next month’s sales. The markup on goods is 25% of cost.
Inventory purchases are paid for in the month following the purchase.
Recurring monthly expenses are as follows:
Salaries and wages $10,000
Depreciation on plant and equipment 4,000
Utilities 1,000
Other 1,700
f. Property taxes of $15,000 are due and payable on July 15.
Answer (2)
A cash budget is a financial plan that estimates cash inflows and outflows over a specified period, typically a quarter or year, helping a business manage its liquidity.
To prepare the cash budget for Grange Retailers for the third quarter, we need to consider the sales, collections, inventory purchases, and expenses:
Sales and Collections:
Cash Sales: 30% of sales each month.
Credit Sales Collection:
20% of credit sales are collected in the month of the sale.
50% in the month following the sale.
30% in the second month following the sale.
For example, in July with estimated sales of $90,000:
Cash sales: 30% of $90,000 = $27,000
Credit sales: 70% of $90,000 = $63,000
Collection of July's credit sales in July: 20% of $63,000 = $12,600
Collection of June's credit sales: 50% of 120,000 (June credit sales) = $42,000
Collection of May's credit sales: 30% of 70,000 (May credit sales) = $21,000
Inventory Purchases:
Ending inventory must be 50% of the cost of the subsequent month's sales.
Markup is 25% of cost, meaning if sales are X , t h e n cos t i s X / 1.25.
Calculate inventory purchases for each month based on next month's sales.
For instance, with August sales estimated at $100,000:
Cost of August sales: $100,000 / 1.25 = $80,000
Required ending inventory for July: 50% of $80,000 = $40,000
Expenses and Liabilities:
Monthly Expenses:
Salaries and wages: $10,000
Depreciation: $4,000 (non-cash and does not affect cash flow)
Utilities: $1,000
Other: $1,700
Property Taxes: $15,000 due on July 15.
Payment of Inventory Purchases:
Inventory purchases are paid in the month following the purchase.
So, for July purchases needed for August sales:
Inventory cost: $40,000 (for August)
Payment in August for July purchases would be for purchases needed in July calculated similarly.
Summary of Collections and Payments:
Sum up all cash inflows from collections and account for all cash outflows from expenses and inventory payments to get the net cash position for each month.
By listing all these steps and components, Grange Retailers can have a clear view of their expected cash position throughout the third quarter.
A cash budget for Grange Retailers can be prepared by analyzing sales and collections, calculating inventory purchases, and accounting for expenses. Each step involves detailed cash inflows from sales and cash outflows from expenses and payments. By compiling these elements accurately, the company can forecast its cash position for the third quarter.
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