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

Exercise 70

Cash budget — part 2 Refer to the PrimeTime Sportswear data presented in Problem 14.13.

Required:

a. Prepare a cash budget for August and September. What are the prospects for this company if its sales growth continues at a similar rate?

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b. Assume now that PrimeTime Sportswear is a mature firm, and that the July-September data represent a seasonal peak in business. Prepare a cash budget for October, November, and December, assuming that the income statements for November and December are the same as October’s. Explain how the cash budget would be used to support a request to a bank for a seasonal loan.

Step 1 of 4

a.

Cash budget:

Cash budget is the budget that prepares to estimate the expected receipts and payments of cash for a particulars period. This budget is prepared based on the various operating budgets and capital expenditures incurred during that period in addition to the above dividends and interests paid, and other receipts formed as part of the cash budget.

Prepare Cash budget:

To prepare a cash budget, the other budgets such as sales budget, merchandise purchase budget, selling expense budget and general and administrative purchase needs to be prepared.

The cash disbursements budget includes the cash payment made for the period.

The budgeted cash receipts include the sales revenue earned during the year.

• Consider the cash receipts for the months of August, September and October.

• Consider the cash disbursements for the months of August, September and October.

• Consider the minimum closing balance of cash.

A cash budget for August and September is as follows:

CASH BUDGET (August and September)
Particulars	August	September	October
Given:
Sales forecast	108,000	136,000	118000
Purchases budget	88,000	97,800	66200
Operating expense budget	25,600	28,600	32200
Beginning cash (a)	(620)	(28,720)
Cash receipts:
June 30 accounts receivable	30,000	0
July sales	50,400	29,400
August sales	0	64,800
September sales	0	0
Total cash receipts (b)	80,400	94,200
Cash disbursements:
July purchases	22,680	0
August purchases	61,600	26,400
September purchases	0	68,460
July operating expenses	6,300	0
August operating expenses	17,920	7,680
September operating expenses	0	20,020
Total cash disbursements (c)	108,500	122,560
Ending cash ( a + b-c)	(28,720)	(57,080)

The prospects of Primetime Sportswear’s are not good, and it seems that the company will shortly have to state bankruptcy since there is not sufficient cash available to pay the bills.