GDBA Cash budget Ch 9

Cash Receipts

CLASS EXERCISE

As the marketing manager of Consumer’s Cosmetics Co., you are expecting total sales revenues to be as
follows:

Date Sales Revenues ($ millions)

October 2019 600

November 2019 660

December 2019 690

January 2020 600

February 2020 620

March 2020 650

April 2020 700

May 2020 740

June 2020 800

The pattern of sales can generally be grouped as follows:

 30% of all sales are cash sales.
 30% of all sales are credit sales collected one month after the sale.
 25% of all sales are credit sales collected two months after the sale.
 15% of all sales are credit sales collected three months after the sale.

Required;
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 GDBA Cash budget Ch 9

(a) Prepare a schedule of cash receipts from sales for January, February, and March 2020 .
Cash Receipts in
Sales revenue ($ millions)
from the month of January February March

October 2019 600 .15*600$ 90.0

November 2019 660 .25*660=165.0 .15*660$ = 99.0

December 2019 690 .30*690=207.0 .25*690=172.5 .15*690=103.5

January 2020 600 .30*600=180.0 .3*600=180.0 .25*600=150.0

February 2020 620 .30*620=186.0 .3*620=186.0

March 2020 650 .3*650=195.0

Total $642.0 $637.5 $634.5

(b) Which month has the greatest amount of cash collections from sales? Explain why.
The month with the greatest amount of cash collections is January ($642 million), even though
it is a month with one of the lowest sales revenue ($600 million). This is because of the sales
revenue collection pattern: most cash receipts (70%) lag behind the month when the sales
were made.
Because of this revenue collection pattern, seasonality is important for Consumer’s Cosmetics
Co. when planning its cash needs.

CLASS EXERCISE

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Maxima Inc. wants a projection of cash receipts and payments for the month of November. On
November 28, a note payable will become due, to the bank that issued it, for $98,500 (including
interest). The cash balance on November 1 will be $29,600. Accounts payable on November 1 were
$280,000. Accounts receivable on November 1 were $132,000.
Sales of Maxima’s only product are always $11 each: 70% of sales are collected in the month of sale and
the other 30% are collected the following month. Each month the company plans to buy enough
inventory to exactly meet demand for the following month. The company takes 30 days credit on all
purchases.
Purchase cost of Maxima’s product is $7 per unit. All expenses are fixed and amount to $150,000 per
month, of which $25,000 is amortization. In November, Maxima expects to pay a dividend of $10,000
and to sell a building for $500,000. The budgeted sales are 40,000 units every month.

Required;
Prepare a cash budget for the month of November.
Maxima Inc.
Cash Budget for November

Cash inflow
Collection of November 1 accounts receivable $132,000
Collection of November sales (40,000 × $11 × 70%) 308,000
Total cash collections from sales $440,000
Sale of building 500,000
Total cash inflow $940,000
Cash outflow
Payments to suppliers (40,000 × $7) $280,000
Expenses ($150,000 – $25,000) 125,000
Loan repayment 98,500
Dividend 10,000
Total cash outflow 513,500
Net cash inflow for November $426,500
Cash balance at November 1 29,600
Cash balance at November 20 $456,100

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 GDBA Cash budget Ch 9

CLASS EXERCISE Cash Budget

Nigh Company prepares monthly cash budgets. Relevant data from operating budgets for 2019 are as
follows:

January February
Sales $350000 $400000
Direct materials purchases 120000 110000
Direct labour 85000 115000
Manufacturing overhead 60000 75000
Selling and administrative expenses 75000 80000

All sales are on account. The company expects collections to be 60% in the month of sale, 30% in the first
month following the sale, and 10% in the second month following the sale. It pays 30% of direct materials
purchases in cash in the month of purchase and the balance due in the month following the purchase. It
pays all other items above in the month incurred. Depreciation has been excluded from manufacturing
overhead and selling and administrative expenses. Other data:

1. Credit sales: November 2019, $200,000, December 2019, $280,000

2. Purchases of direct materials: December 2019, $90,000
3. Other receipts: January-collection of December 31,2019, interest receivable, $3,000; February-
proceeds from sale of securities, $5,000
4. Other disbursements: February-payment of $20,000 cash for land

The company’s cash balance on January 1, 2020, is expected to be $50,000. The company wants to keep
a minimum cash balance of $40,000.

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Instructions
a) Prepare schedules for (1) the expected collections from customers and (2) the expected payments for
direct materials purchases.

(1) Expected Collections from Customers

60% in month of sale
30% in first month following the sale
10% in the second month following the sale

January February March April

November Sales
10% x 200,000 20,000

December Sales
30% x 280,000 84,000
10% x 280,000 28,000

January Sales
60% x 350,000 210,000
30% x 350,000 105,000
10% x 350,000 35,000
February Sales
60% x 400,000 240,000
30% x 400,000 120,000
10% x 400,000 _________ ________ ________ 40,000
314,000 373,000 155,000 40,000

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(2) Expected Payments for Direct Materials

Determine the purchase of direct material for each month

December January February

Purchase direct material 90,000 120,000 110,000

Cash outlay
30 % in month of purchase
Balance 70% in the following month

December January February March

December Purchase
30% x 90,000 27,000
70% x 90,000 63,000

January Purchase
30% x 120,000 36,000
70% x 120,000 84,000

February Purchase
30% x 110,000 33,000
70% x 110,000 _________ ________ ________ 77,000
27,000 99,000 117,000 77,000

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 GDBA Cash budget Ch 9

b) Prepare a cash budget for January and February, with columns for each month.
NIGH COMPANY
Cash Budget
For the Two Months Ending February 28, 2020
Jan Feb Total Jan. & Feb.
Jan and feb Beginning cash balance given $50,000 $48,000 $50,000beg
Add: Cash receipts
Collections from credit sales 314,000 373,000 687,000
Collection of interest receivable 3,000 – 3,000
Proceeds from sale of securities – 5,000 5,000
Total receipts 317,000 378,000 695,000
Total available cash 367,000 426,000 745,000
Less: Disbursements
Direct materials 99,000 117,000 216,000
Direct labour 85,000 115,000 200,000
Manufacturing overhead 60,000 75,000 135,000
Selling and administrative expenses 75,000 80,000 155,000
Purchase of land – 20,000 20,000
Total disbursements 319,000 407,000 726,000
Excess (deficiency) of cash available over cash disbursements 48,000 19,000 19,000bal enmd
Financing:
Borrowing – 21,000 21,000
Less: Interest expense – – –
Less: Repayment – – –
Total financing – 21,000 21,000
Ending cash balance $48,000 $40,000 $40,000end

Assume we pay interest same month

Assume interest is 12 % a year
Calculate approximately 1 month interest
1 month is 1750
Then 21000 + 210 = 21,210
Borrow 21,5 00 or max 22,000 and see if we are above
22,500 x 12 % for 1 month 215