Question

Colter Company prepares monthly cash budgets. Relevant data from operating budgets for 2020 are as follows January February Sales $363,600 $404,000 Direct materials purchases 121,200 126.250 Direct labor 90,900 101.000 Manufacturing overhead 70,700 75,750 Selling and administrative expenses 79.790 85,850 All sales are on account, Collections are expected to be 50% in the month of sale, 30 % in the first month following the sale, and 20% in the second month following the sale, Sixty percent (60%) of direct materials purchases are paid in cash in the month of purchase, and the balance doe is paid in the month following he purchase. All other items above are paid in the month incurred except for selling and administrative expenses that inckude $1,010 of depreciation per month Other data: 1. Credit sales: November 2019, $252,500; December 2019, $323,200 2. Purchases of direct materials: December 2019, $101,000 Other receipts: January-Collection of December 31, 2019, notes receivable $15,150 3 February-Proceeds from sale of securities $6.060 4. Other disbursements: February-Payment of $6,060 cash dividend The company's cash balance on January 1,2020, is expected to be $60,600. The company wants to maintain a minimum cash balance of $50,500

Answer 1

1. Expected collections from customers:

	January($)	February($)
November	50,500
	($252,500 * 20%)
December	96,960	64,640
	($323,200 * 30%)	($323,200 * 20%)
January	1,81,800	1,09,080
	($363,600 * 50%)	($363,600 * 30%)
February		2,02,000
		($404000 * 50%)
Total collections ($)	3,29,260	3,75,720

2. Expected payments for direct materials:

	January($)	February($)
December	40,400
	($101,000 * 40%)
January	72,720	48,480
	($121,200 * 60%)	($121,200 * 40%)
February		75,750
		($126,250 * 60%)
Total Payments ($)	1,13,120	1,24,230

3. Cash budget for the month of January and February:

	January($)	February($)
a. Opening cash balance	60,600	51,510
b. Expected cash collections	3,29,260	3,75,720
c. Notes receivable	15,150	-
d. Proceeds from sale of securities	-	6,060
e. Total cash receipts (b+c+d)	3,44,410	3,81,780
f. Expected payments for direct materials	1,13,120	1,24,230
g. Expected payments for direct labor	90,900	1,01,000
h. Expected payments for manufacturing overhead	70,700	75,750
i. Expected payments for selling and administrative expenses	78,780	84,840
(Total expense less Depreciation)	($79,790 - $1,010)	($85,850 - $1,010)
j. Total cash disbursements (f+g+h+i)	3,53,500	3,85,820
k. Cash position at the end of the month (a+e-j)	51,510	47,470
l. Target cash balance (Given)	50,500	50,500
m. Surplus cash or (loan needed) (k-l)	1,010	-3,030

Since depreciation is an non-cash expenditure, it will not be considered for preparing the cash budget. Hence deducted from the selling and administrative expenses.

From the above we can notice that the cash balance for the month of February falls short of the target cash balance of $50,500. Hence a loan of $3,030 will be obtained.