Cash Budgets practical problems and solutions

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 10, 2021

Problem 1

From the following information, prepare cash budget for the month of January to April:

Expected Sales Expected Purchase
$ $
Jan. 60,000 Jan. 48,000
Feb. 40,000 Feb. 80,000
Mar. 45,000 Mar. 81,000
Apr. 40,000 Apr. 90,000

Wages to be paid to workers Rs. 5,000 each month. Balance at the bank on 1st Jan. $8,000. It has been decided by the Management that:
(i) In case of deficit fund within the limit of $10,000 arrangements can be made with bank.
(ii) In case of deficit fund exceeding Rs. 10,000 but within the limits of $42,000 issue of debentures is to be preferred.
(iii) In case of deficit fund exceeding $42,000, issue of shares is preferred (considering the fact that it is within the limit of authorized capital).

Solution

Particulars Jan. Feb. Mar. Apr.
Receipts: $ $ $ $
Opening balance 8,000 15,000
Sales 60,000 40,000 45,000 40,000
Issue of debentures 30,000 41,000
Issue of shares 55,000
Total 68,000 85,000 86,000 95,000
Less: Payments
Purchases 48,000 80,000 81,000 90,000
Wages 5,000 5,000 5,000 5,000
Closing Cash 53,000 85,000 86,000 95,000
15,000

Problem 2

Prepare Cash Budget of a Company for April, May and June 2019 in a columnar form using the following information:

Month Sales Purchase Wage Exp.
Jan. (Actual) 80,000 45,000 20,000 5,000
Feb. (Actual) 80,000 40,000 18,000 6,000
March (Actual) 75,000 42,000 22,000 6,000
April Budget 90,000 50,000 24,000 6,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000

You are further informed that:
(a) 10% of purchase and 20% of Sale are for cash
(b) The average collection period of the Co. is 1/2 month and credit purchase is paid off regularly after one month
(c) Wages are paid half monthly and the rent of $500 excluded in expense is paid monthly
(d) Cash and Bank Balance on April 1, was $15,000 and the company wants to keep it on end of every month below this figure, the excess cash being put in fixed deposits.

Solution

Cash Budget – 2019:

April ($) May ($) June ($)
Cash & Bank Balance 15,000 11,700 12,700
Add:
Cash Sale (20%) 18,000 17,000 16,000
Cash collections From Drs. 66,000 70,000 66,000
99,000 98,700 94,700
Less:
Cash Outflow
Cash flow (10%) 5,000 4,500 3,500
Payment of Crs. 37,800 45,000 40,500
Wages 23,000 22,000 19,000
Rent 500 500 500
Exp. 6,000 6,000 6,000
Fixed Deposits 15,000 8,000 13,000
Cash balance (closing) 21,700 12,700 13,200
99,000 98,700 94,700

Problem 3

From the following information prepare a monthly cash budget for the three months ending 31st Dec.2019.

Month Sales
($)
Materials
($)
Wages
($)
Production
($)
Admin. Selling, etc
($)
June 3,000 1,800 650 225 160
July 3,250 2,000 750 225 160
Aug. 3,500 2,400 750 250 175
Sep. 3,750 2,250 750 300 175
Oct. 4,000 2,300 800 300 200
Nov. 4,250 2,500 900 350 200
Dec. 4,500 2,600 1,000 350 225

(i) Credit terms are:
(a) Sales — 3 months to debtors. 10% of sales are on cash. On an average, 50% of credit sales are paid on the due dates while the other 50% are paid in the month following
(b) Creditors for material — 2 months.
(ii) Lag in payment:
Wages. 1/4 month, overheads — 1/2 month.
(iii) Cash and Bank Balance on 1st Oct. expected $1,500.
(iv) Other information
(a) Plant and Machinery to be installed in Aug. at a cost of $24,000. It will be paid for by monthly installments of $5,00 each from 1st Oct.;
(b) Preference share dividend @ 5% on $50,000 are to be paid on 1st Dec.
(c) Calls on 250 equity shares @ $2 per share expected on 1st November;
(d) Dividends from investments amounting to $250 are expected on 31st Dec.;
(e) Income tax (advance) to be paid in December $ 500

Solution

Cash Budget
Period: 3 months ending 31 Dec. 2019
Details: Ocr. ($) Nov. ($) Dec. ($)
Balance b/d 1,500.00 537.50 350.00
Receipts (Estimated):
Sales 3,212.50 3,462.50 3,712.50
Capital 500.00
Dividends 250.00
Total (A) 4,712.50 4,500 4,312.50
Payments:
Creditors 2,400.00 2,250.00 2,300.00
Wages 787.50 875.00 975.00
Overheads:
Production 300.00 325.00 350.00
Adm. S. & D. 187.50 200.00 212.50
Pref. Dividend 2,500.00
Income tax 500.00
Plant and Machinery 500 each 5,00.00 5,00.00 5,00.00
Total (B) Year 4,175.00 4,150.00 7,337.50
Balance c/d (A – B) 537.50 350 (-3,025)

Calculation of amount of sales:

Month Sale ($) Oct. ($) Nov. ($) December ($)
June 3,000 1,350.00
July 3,250 1,462.50 1,462.50
Aug. 3,500 1,575.00 1,575.00
Sep. 3,750 1,687.50
Oct. 4,000 400.00
Nov. 4,250 4,250
Dec. 4,500 450.00
Total 3,212.50 3,462.50 3,712.50

Wages Calculation

1/4 wages of September and 3/4 wages of Oct. Thus,
(1/4 x 750) = 187.50
3/4 x 800 = 600
Total = 787.50
The wages of other months will be calculated on the same pattern.

23 thoughts on “Cash Budgets practical problems and solutions”

  1. In problem 2, the closing balance should be 15000 for each month and same should be the opening balance for the following months. The excess of 15000 should be deposited to FD. So the deposit in april will be 11700, in may it should be 9000 and in June it should be 13500. Expenses in june should be 5000 not 6000 as there is no lag period mentioned for the same
    The first point under additional information should be edited, both percentage are mentioned for purchase one should be for sales.
    Apologies for being so critical, this page was over all very helpful in revisiting my concepts as i required. Thanks! Kudos!

    Reply
  2. In problem 3
    (a) Plant and Machinery to be installed in Aug. at a cost of $24,000. It will be paid for by monthly installments of $5,000 each from 1st Oct
    In solution, it is taken at 500 per month.

    Reply
  3. hello plz help me for solving this question
    i have exam on 23 march 2020 so plz reply me urgentlly.
    cash budget
    1.extract of the statement of financial position of capital engineering as at 31 dec 20X6.
    cash at bank $295000
    accounts receivable $199000
    account payable $585000
    jan feb march
    credit sales $790000 $660000 520000
    case sales 52000 65000 70000
    credit purchase 770000 595000 720000
    cash purchase 80000 90000 75000
    1).80% of the credit sales in any particular month will be collected in the month of the sales are made and the remaining 20% will be collected in the following month. all accounts receivable as at 31 dec 2006 will be collected by 31 jan 2007.
    2).all credit purchase are paid in the month following the purchase.all accounts payable as at 31 dec 2006 will be paid by 31 jan 2007.
    3).rental expense per monthof $12000 needs to be paid at the begning of every month.
    4).the salesman will be entitled to a 1% commission on the total monthly sales and will be paid in the month of the sales.
    5).a new machine bought in jan 2007 costing $50000 wil be paid in two equal instalments starting from feb 2007.
    (required)
    1.prepare cash collection schedule from the sales and accounts receivables.
    2.prepare a cash payment for purchase and account payables.
    3.prepare the cash budget for the three months ending 31 march 2007.

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  4. JL is preparing its cash budget for the next three quarters. The following data have been extracted from the operational budgets:
    Sales revenue
    Quarter 1​​OMR 500,000
    Quarter 2​​OMR 450,000
    Quarter 3​​OMR 480,000
    Direct material purchases
    Quarter 1​​OMR 138,000
    Quarter 2​​OMR 151,200​
    Quarter 3​​OMR 115,600
    Additional information is available as follows:
    • JL sells 20% of its goods for cash. Of the remaining sales value, 70% is received within the same quarter as sale and 30% is received in the following quarter. It is estimated that trade receivables will be OMR 125,000 at the beginning of Quarter 1. No bad debts are anticipated.
    • 50% of payments for direct material purchases are made in the quarter of purchase, with the remaining 50% in the quarter following purchase. It is estimated that the amount owing for direct material purchases will be OMR 60,000 at the beginning of Quarter 1.
    • JL pays labour and overhead costs when they are incurred. It has been estimated that labour and overhead costs in total will be OMR 303,600 per quarter. This figure includes depreciation of OMR 19,600.
    • JL expects to repay a loan of OMR 100,000 in Quarter 3.
    • The cash balance at the beginning of Quarter 1 is estimated to be OMR 49,400 positive.
    You are required to calculate:-
    Prepare a cash budget for each of the THREE quarters.

    Reply
  5. Hello every one can i please have the solution for this question as i am really stuck in it.
    Alexandr Co a leather goods manufacturer is planning to prepare its cash budget for the year 2020 -2021 ( July 2020 to June 2021 ) , due to pandemic condition this year cash budget is quiet critical and company has original plan for expansion in this year but once you prepare this budget let company know whether they can opt for the expansion of Rs 500 million from own sources or not and if you feels like that company should opt for expansion from external source what source you recommend
    Opening cash balance on 1st July 2020 Rs 350 million
    This year projections are as follows
    1) Sales for July 2020 is expected to be Rs 80 million and will grow with rate of 5% per month from the last month sales .
    2) Recovery from last year sales is expected Rs40 million in July 2020 and rs 60 million in Sep 2020.
    3) For current year sales recovery 50% in month of sales , 30 % in following month , 15% in second month of sales and 5% bad debt .
    4) Purchase are made 40% of value of particular month sales but paid 75% in month of purchase and 25% in following month
    5) Against last year purchases Rs 20 million needs be paid in July 2020 and Rs 15 million in August 2020
    6) Overhead cash expenses are estimated to Rs 5 million for July 2020 but will increase by 2 % each month . Overhead expenses are paid in month they occurred
    7) Sales and marketing expenses are estimated toRs 4 million in July 2020 with a increase 8% per month . Marketing expenses are paid in the following month of expenses

    Reply
  6. Hello please help me to compute these Cash Budget for 2019
    How to compute the collections from sales
    -80% on the month the sales are made
    – the remaining 20% will be on the next month
    January sales- 220,000
    February – 250, 000
    March -300,000

    Reply
  7. Simmons Company is planning to request a line of credit from its bank. The following sales forecasts have been made for parts of 2017 and 2018: In Rs May 2017 150,000 June 150,000 July 300,000 August 450,000 September 600,000 October 300,000 November 300,000 December 75,000 January 2018 150,000 Collection estimates obtained from the credit and collection department are as foilows: collected within the month of sale, 5 percent; collected the month following the sale, 80 percent; collected the month following sale, 15 percent. Payments for labor and raw materials are typically made during the month following the month which these costs are incurred. Total labor and raw materials costs are estimated for each month as follows: In Rs May 2017 75,000 June 75,000 July 105,000 August 735,000 September 255,000 October 195,000 November 135,000 December 75,000 General and administrative salaries will amount to approximately Rs 22,500 a month; lease payments under long-term lease contracts will be Rs 7,500 a month; depreciation charges Rs 30,000 a month; miscellaneous expenses will be Rs 2,250 a month; income tax payments of Rs 52,500 will be due in both September and December; and a progress payment of Rs 150,000 on a new research laboratory must be paid in October. Cash on hand on July I will amount to RS 110,000 and a minimum cash balance of Rs 75,000 will be maintained through-out the cash budget period. Prepare a cash budget for the last six months of 2017 with an estimate of required financing (or excess funds).

    Reply
  8. Hello you can help me please Golden Diamond Jeweler Inc is currently forecasting a revenue of Php2,000,000, Php3,200,000 and Php1,200,000 for the months of October, November, and December respectively. Sales of the month of September is Php1,300,000. The business currently have a cash balance of 500,000 at the end of September and the company requires Php800,000 as its minimum cash requirement. Given the additional information below, prepare a cash budget for the months of October, November, and December
    50% of the company’s revenue is usually paid in cash and 50% is paid through credit card where credit card companies usually pay the following month.
    Additional income of Php200,000 per month is receive from cleaning services of jewelries.
    Companies purchases on credit per month are Php300,000 for September; Php200,000 for October; Php500,000 for November and Php700,000 on December which are all paid the following month of purchase.
    Salaries and wages would usually average to Php80,000 per month
    Costs of sales is usually 30% of monthly sales
    Operating expense is usually 10% of monthly sales
    Loans payment per month is Php100,000
    It is expected that repairs and maintenance expense of Php10,000 will be incurred every month
    The company expects to purchase new equipment worth Php100,000 on November
    Tax of Php200,000 will be paid on December
    The company is also to pay a total of Php100,000 for employees end year bonus on December.
    A total of Php300,000 is to be paid as dividends to preferred stockholders on December.

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  9. Golden Diamond Jeweler Inc is currently forecasting a revenue of Php2,000,000, Php3,200,000 and Php1,200,000 for the months of October, November, and December respectively. Sales of the month of September is Php1,300,000. The business currently have a cash balance of 500,000 at the end of September and the company requires Php800,000 as its minimum cash requirement. Given the additional information below, prepare a cash budget for the months of October, November, and December
    50% of the company’s revenue is usually paid in cash and 50% is paid through credit card where credit card companies usually pay the following month.
    Additional income of Php200,000 per month is receive from cleaning services of jewelries.
    Companies purchases on credit per month are Php300,000 for September; Php200,000 for October; Php500,000 for November and Php700,000 on December which are all paid the following month of purchase.
    Salaries and wages would usually average to Php80,000 per month
    Costs of sales is usually 30% of monthly sales
    Operating expense is usually 10% of monthly sales
    Loans payment per month is Php100,000
    It is expected that repairs and maintenance expense of Php10,000 will be incurred every month
    The company expects to purchase new equipment worth Php100,000 on November
    Tax of Php200,000 will be paid on December
    The company is also to pay a total of Php100,000 for employees end year bonus on December.
    A total of Php300,000 is to be paid as dividends to preferred stockholders on December.

    Reply

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