The LBJ Company has budgeted sales revenues as follows.<?xml:namespace prefix =
ID: 2376616 • Letter: T
Question
The LBJ Company has budgeted sales revenues as follows.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
April May June
Credit sales $94,000 $89,500 $75,000
Cash sales 48,000 75,000 57,000
Total sales $142,000 $164,500 $132,000
Past experience indicates that 30% of the credit sales will be collected in the month of sale and the remaining 70% will be collected in the following month.
Purchases of inventory are all on credit and 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $195,000 in April, $135,000 in May, and $63,000 in June.
Other budgeted cash receipts: (a) sale of plant assets for $33,000 in May, and (b) sale of new common stock for $50,000 in June. Other budgeted cash disbursements: (a) operating expenses of $15,000 each month, (b) selling and administrative expenses of $10,150 each month, (c) purchase of equipment for $35,000 cash in May, and (d) dividends of $20,000 will be paid in June.
The company has a cash balance of $20,000 at the beginning of May and wishes to maintain a minimum cash balance of $20,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 10%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of May 1.
1. Use this information to prepare a cash budget for the months of May and June, using the template provided in Doc Sharing.
2. What are the three sections of a cash budget, and what is included in each section?
3. Why is a cash budget so vital to a company?
4. What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?
Explanation / Answer
The cash budget contains the following three sections:
May June Opening balance 20000 20000 + Cash sales 75000 57000 + Collection from credit sales 26850 22500 + Collection from credit sales(last month) 65800 62650 + sale of plant assets/common new stock 33000 50000 + credit from bank 30500 - payment for purchases 54000 25200 - for prev month's purchases 117000 81000 - operating expenses 15000 15000 - S&A 10150 10150 - Repayment of loan and interst thereon 31009 - Purchase of equip 35000 - dividends payment 20000 Net cash at the end 20000 29791Related Questions
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