Problem 1

From the information below, prepare a cash budget for the period from 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

The wages to be paid to workers amount to  $5,000 each month. Also, the bank balance on 1st January was $8,000. The management decided on the following:

  • If the deficit fund is within the limit of $10,000, it is possible to make arrangements with the bank.
  • If the deficit fund exceeds $10,000 but is within the limit of $42,000, the issue of debentures is preferred.
  • If the deficit fund exceeds $42,000, the 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

From the information below, prepare a cash budget for a company for April, May, and June 2019 in a columnar form.

Month Sales Purchases Wages Exp.
Jan. (actual) 80,000 45,000 20,000 5,000
Feb. (actual) 80,000 40,000 18,000 6,000
Mar. (actual) 75,000 42,000 22,000 6,000
Apr. Budget 90,000 50,000 24,000 6,000
May Budget 85,000 45,000 20,000 6,000
Jun. Budget 80,000 35,000 18,000 5,000

You are further informed that:

  • 10% of purchases and 20% of sales are for cash.
  • The average collection period of the company is half a month and credit purchases are paid off regularly after one month.
  • Wages are paid half monthly and the rent of $500, excluded in expense, is paid monthly.
  • Cash and bank balance on April 1 was $15,000, and the company aims to keep it below this figure at the end of every month. The excess cash is placed in fixed deposits.

Solution

Cash Budget for 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 December 2019.

Month Sales
($)
Materials
($)
Wages
($)
Production
($)
Admin. Selling, etc
($)
Jun. 3,000 1,800 650 225 160
Jul. 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

The credit terms are as follows:

  • Sales — 3 months to debtors. 10% of sales are in cash. On average, 50% of credit sales are paid on the due dates, while the other 50% are paid in the next month.
  • Creditors for material — 2 months.

The lag in payment for wages is 1/4 month and 1/2 month for overheads.

The cash and bank balance on 1st October is expected to be $1,500.

Other information is given as follows:

  • Plant and machinery are to be installed in August at a cost of $24,000. This sum will be paid in monthly installments of $500 each from 1st October.
  • Preference share dividends @ 5% on $50,000 are to be paid on 1st December.
  • Calls on 250 equity shares @ $2 per share are expected on 1st November.
  • Dividends from investments amounting to $250 are expected on 31st December.
  • Income tax (advance) is to be paid in December $500

Solution

Cash Budget for Three Months Ending 31 Dec. 2019
Details: Oct. ($) Nov. ($) 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. ($) December ($)
Jun. 3,000 1,350.00
Jul. 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

Calculation of Wages

1/4 wages for September and 3/4 wages for October. Therefore, the calculation is:

(1/4 x 750) = 187.50
3/4 x 800 = 600
Total = 787.50

The wages for the other months can be calculated using the same approach.

True is a Certified Educator in Personal Finance (CEPF®), contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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