You have been asked to prepare a December cash budget for Ashton Company, a dist

Question

You have been asked to prepare a December cash budget for Ashton Company, a distributor of exercise equipment. The following information is available about the company's operations: a. The cash balance on December 1 is $44,400 b. Actual sales for October and November and expected sales for December are as follows: Cash sales Sales on account October November December $ 72,600 86,600$ 89,000 425,000 601,000 617,000 Sales on account are collected over a three-month period as follows: 20% collected in the month of sale, 60% collected in the month following sale, and 18% collected in the second month following sale. The remaining 2% is uncollectible. c. Purchases of inventory will total $358,000 for December. Thirty percent of a month's inventory purchases are paid during the month of purchase. The accounts payable remaining from November's inventory purchases total $207,000, all of which will be paid in December d. Selling and administrative expenses are budgeted at $459,000 for December. Of this amount, $64,500 is for depreciation e. A new web server for the Marketing Department costing $114,000 will be purchased for cash during December, and dividends totaling $9,500 will be paid during the month f The company maintains a minimum cash balance of $20,000. An open line of credit is available from the company's bank to increase its cash balance as needed.

Explanation / Answer

1. Collection pattern = 20% in the month of sale, 60% in the in the month following sale, 18% in the second month following sale.

Cash collections from credit sales for december = 20% of december sales + 60% of november sales + 18% of october sales

= [(617,000-89,000)*20%] + [(601,000-86,600)*60%] + [(425,000-72,600)*18%] = 477,672

Total cash collections for december = Cash sales + collections from credit sales = 89,000 + 477,672 = 566,672.

2. 30% of month's inventory purchases are paid during the month

Purchase of inventory in december = 358,000

Accounts payable from november to be paid in december = 207,000

Expected cash disbursements for merchandise purchase for december = (358,000*30%) + 207,000 = 314,000

3. Ashton Company

Cah Budget

For the month of December

Beginning cash balance 44,400 Add collections from customers 566,672 Total cash available 611,072 Less cash disbursements : Payment to suppliers for inventory 314,000 Selling and administrative expenses 394,500(459,00-64,500) New web server 114,000 Dividends paid 9,500 Total cash disbursements 832,000 Excess(deficiency) of cash available over disbursements (220,928) Financing : Borrowings 240,928 Repayments Interest Total financing Ending cash balance 20,000

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