The Controller of Santa Fe Housewares Inc. instructs you to prepare a monthly ca

Question

The Controller of Santa Fe Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

March April May

Sales 70,000 84,000 92,000

Manufacturing cost 32,000 39,000 42,500

Selling and administrative expenses 12,000 18,000 21,000

Capital expenditures 20,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $3,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in July, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of March 1 include cash of $10,000, marketable securities of $40,000, and accounts receivable of $75,600 ($60,000 from February sales and $15,600 from January sales).Sales on account for January and February were $52,000 and $60,000, respectively.

Current liabilities as of March 1 include a $12,000, 15%, 90-day note payable due May 20 and $4,000 of accounts payable incurred in February for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $1,800 in dividends will be received in March. An estimated income tax payment of $16,000 will be made in April. Santa Fe's regular quarterly dividend of $3,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $30,000.

Instructions:

1. Prepare a monthly cash budget and supporting schedules for March, April, and May.

2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

Explanation / Answer

January Cash Budget
Beginning Balance 52,000
Cash Collections
260,000 x 10% = 26,000 from November sales
300,000 x 30% = 90,000 from December sales
350,000 x 60% = 210,000 from January sales
Note Receivable = 15,000
Total cash collections = 341,000
Cash Disbursements
100,000 x 50% = 50,000 from December purchases
110,000 x 50% = 55,000 from January purchases
Salaries = 84,000
Administrative expenses = 69,000
Selling expenses = 79,000
Total disbursements = 337,000
52,000 + 341,000 - 337,000 = 56,000 ending cash balance

February Cash Budget
Beginning Balance 56,000
Cash Collections
300,000 x 10% = 30,000 from December sales
350,000 x 30% = 105,000 from January sales
400,000 x 60% = 240,000 from February sales
Sale of securities = 6,000
Total cash collections = 381,000
Cash Disbursements
110,000 x 50% = 55,000 from January purchases
130,000 x 50% = 65,000 from February purchases
Salaries = 95,000
Administrative expenses = 74,000
Selling expenses = 88,000
Dividends = 12,000
Total disbursements = 389,000
56,000 + 381,000 - 389,000 = 48,000 ending cash balance
Since the company wants to maintain a minimum $50,000 cash balance, they may have to take out a short-term loan of $2,000.

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