Budgeting for Cash Collections and Cash Payments. Hershel’s Chocolate produces c

Question

Budgeting for Cash Collections and Cash Payments. Hershel’s Chocolate produces chocolate bars. The treasurer at Hershel’s Chocolate is preparing the cash budget and would like to know when cash collections from sales and cash payments for materials will occur. The dollar amount of the company’s quarterly sales and direct materials purchases are projected to be as follows (this information is the result of working the previous problems for Hershel’s Chocolate):

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? All sales are made on credit. The company expects to collect 60 percent of sales in the quarter of sale and 40 percent the quarter following the sale. Accounts receivable at the end of last year totaled $770,000, all of which will be collected during the first quarter of this coming year.

? All direct materials purchases are on credit. The company expects to pay 80 percent of purchases in the quarter of purchase and 20 percent the following quarter. Accounts payable at the end of last year totaled $257,000, all of which will be paid during the first quarter of this coming year.

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Figure 9.11

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Please show all the steps and write full explanations to the following questions:

a. Prepare a budget for cash collections from sales. Refer to the format shown at the top of Figure 9.11 "Cash Budget for Jerry’s Ice Cream".

b. Prepare a budget for cash payments for purchases of materials. Refer to the format shown in the middle section of Figure 9.11 "Cash Budget for Jerry’s Ice Cream".

c. How will the treasurer use this information?

1st 2nd 3rd 4th Sales $2,000,000 $2,100,000 $2,200,000 $2,425,000 Direct materials purchases $1,215,000 $1,276,125 $1,349,400 $1,417,575 Jerry's Ice Cream Cash Budget Year Ending December 31 Quarter 2 4 Year Cash collections from sales* $ 180,000 144,000 Fourth quarter prior year (assumed) First quarter ($240,000 sales) Second quarter ($288,000 sales) Third quarter ($360,000 sales) Fourth quarter ($312,000 sales) $180,000 240,000 288,000 360,000 187,200 331,200 $1,255,200 96,000 172,800 115,200 216,000 144,000 187,200 Total cash collections $324,000 268,800 $ 331,200 Cash payments for purchases of materials** (30,000) (59,472) Fourth quarter prior year (assumed) First quarter ($84,960 purchases) Second quarter ($102,400 purchases) Third quarter ($115,200 purchases) Fourth quarter ($101,920 purchases) (30,000) (84,960) (102,400) (34,560)(115,200) (71,344) $ (89,472)(97,168 $(111,360) $(105,904)$ (403,904) (25,488) (71,680) (30,720) (80,640) (71,344) Total cash payments for purchases Other cash payments*** Direct labor Manufacturing overhead*** Selling and administrative Capital expenditures (53,040) (45,400) (55,000) (63,960) (49,600) (55,000) (76,960) (54,600) (55,000) (66,560)(260,520) (50,600) (55,000) (25,000) (200,200) (220,000) (25,000) Total other cash payments 60 (186,560 197,160 705,720) 160 $(705,720 Excess of collections over paymentsA Beginning cash balanceAA Ending cash balanceAAA 33,280 94,160 127,440 3,072 81,088 10,000 28,136 127,440 145,576 91,088 $ 91,088 94,160 10,00 155,576 155,576

Explanation / Answer

Cash collection from sales budget 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year Prior year sales 770000 770000 1st Quarter sales $ 2000000 1200000 800000 2000000 2nd Quarter sales $ 2100000 1260000 840000 2100000 3rd Quarter sales $ 2200000 1320000 880000 2200000 4th Quarter sales $ 2425000 1455000 1455000 TOTAL COLLECTIONS 1970000 2060000 2160000 2335000 8525000 Cash payments for raw material purchaes budget 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year Prior year purchases 4th Quarter 257000 257000 1st Quarter purchases $ 1215000 972000 243000 1215000 2nd Quarter purchases $ 1276125 1020900 255225 1276125 3rd Quarter purchases $1349400 1079520 269880 1349400 4th Quarter sales $ 2425000 1134060 1134060 TOTAL PAYMENTS 1229000 1263900 1334745 1403940 5231585 c. TOTAL COLLECTIONS 1970000 2060000 2160000 2335000 8525000 TOTAL PAYMENTS 1229000 1263900 1334745 1403940 5231585 Excess/(Shortfall) 741000 796100 825255 931060 3293415 The treasurer can have an idea of of excess cash available to meet other cash expenses such as those in the Exhibit. He can plan to generate cash in advance, for the quarters that may fall cash strapped, for smooth functioning of the concern. Also he can plan to utilise /invest excess cash , when available. Planning, budgeting and monitoring are the key for efficient budgeting system.

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