Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 68

Cash budget — part 1 PrimeTime Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management’s most optimistic projections. Sales are made on account and collected as follows: 60% in the month after the sale is made and 35% in the second month after sale. Merchandise purchases and operating expenses are paid as follows:

In the month during which the merchandise
is purchased or the cost is incurred	70%
In the subsequent month	30%

PrimeTime Sportswear’s income statement budget for each of the next four months, newly revised to reflect the success of the firm, follows:

	July	August	September	October
Sales	$84,000	$108,000	$ 136,000	$118,000
Cost of goods sold:
Beginning inventory	$12,000	$ 28,800	$ 41,200	$ 43,800
Purchases	75,600	88,000	97,800	66,200
Cost of goods available for sale	$87,600	$116,800	$ 139,000	$110,000
Less: Ending inventory	(28,,800)	(41,200)	(43,800)	(40,000)
Cost of goods sold	$58,800	$ 75,600	$ 95,200	$ 70,000
Gross profit	$25,200	$ 32,400	$ 40,800	$ 48,000
Operating expenses	21,000	25,600	28,600	32,200
Operating income	$4,200	$ 6,800	$ 12,200	$ 15,800

Cash on hand June 30 is estimated to be $75,000. Collections of June 30 accounts receivable were estimated to be $40,000 in July and $30,000 in August. Payments of June 30 accounts payable and accrued expenses in July were estimated to be $48,000.

Required:

a. Prepare a cash budget for July.

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b. What is your advice to management of PrimeTime Sportswear?

Step 1 of 2

a.		July	August
	Sales forecast	$84,000	$108,000
	Purchases budget	75,600	88,000
	Operating expense budget	21,000	25,600
	Beginning cash	$75,000

	Cash receipts:
	June 30 accounts receivable	40,000
	July sales	0
	Total cash receipts	$40,000
	Cash disbursements:
	June 30 accounts payable and accrued expenses	$48,000
	July purchases (70% * $75,600	52,920
	July operating expenses (70% * $21,000)	14,700
	Total cash disbursements	$115,620
	Ending cash	$   (620)