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:

The cash balance on December 1 is $41,600.

Actual sales for October and November and expected sales for December are as follows:

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.

Purchases of inventory will total $285,000 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 $185,000, all of which will be paid in December.

Selling and administrative expenses are budgeted at $455,000 for December. Of this amount, $89,600 is for depreciation.

A new web server for the Marketing Department costing $79,000 will be purchased for cash during December, and dividends totaling $10,000 will be paid during the month.

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.

Required:

1. Calculate the expected cash collections for December.

2. Calculate the expected cash disbursements for merchandise purchases for December.

3. Prepare a cash budget for December. Indicate in the financing section any borrowing that will be needed during the month. Assume that any interest will not be paid until the following month.

October November December Cash sales $ 81,200 $ 72,000 $ 96,200 Sales on account $ 495,000 $ 512,000 $ 684,000

Explanation / Answer

1. Expected cash collections for December = 18% of October sales + 60% of November sales + 20% of December sales

= 18% of 495,000 + 60% of 512,000 + 20% of 684,000 = 89,100 + 307,200 + 136,800 = $533,100

2. Expected cash disbursements for merchandise purchases for December = 30% of December purchases + Accounts payable remaining for November purchases

= 30% of 285,000 + 185,000 = 85,500 + 185,000 = $270,500

3. CASH BUDGET

DETAILS AMOUNT ($) Cash balance at the beginning 41,600 Add: Cash collections 533,100 Cash available for use 574,700 Less: Cash disbursements: Inventory purchase (270,500) S & D Expenses less depreciation (455,000 - 89,600) (365,400) New web server (79,000) Cash dividends (10,000) Net cash available (150,200) Add: Bank Loan (required to maintain minimum cash balance) 170,200 Cash balance at the end 20,000 *-------------------------*-----------------------------*-------------------------------------*

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