Prepare Cash Budget for Service Organization: The Triple-F Health Club (Family, Fitness, and Fun) is a nonprofit health club. The club's board of directors is developing plans to acquire more equipment and expand club facilities. The board plans to purchase about $25,000 of new equipment each year and wants to begin a fund to purchase an adjoining property in four or five years when the expansion will need the space. The adjoining property has a market value of about $300,000. The club manager is concerned that the board has unrealistic goals in light of its recent financial performance. She sought the help of a club member with an accounting background to assist her in preparing the club's records, including the cash basis income statements presented below. The review and discussions with the manager disclosed the additional information that follows the statement.

Additional information:

1. Other financial information as of October 31. 19X7:

a. Cash in checking account. $7,000.

b. Petty cash. $300.

c. Outstanding mortgage balance. $360.000.

d. Accounts payable for supplies and utilities that are unpaid as of October 31. 19X7, and due in November 19X7, $2.500.

2. The club purchased $25,000 worth of exercise equipment during the current fiscal year. Cash of $10,000 was paid on delivery, and the balance was due on October I but has not yet been paid as of October 31, 19X7.

3. The club began operations in 19X1 in rental quarters. In October 19X3, it purchased its current property (land and building) for $600.000. paying $120.000 down and agreeing to pay $30,000 plus 9 percent interest annually on the unpaid loan balance each November 1. starting November 1. 19X4.

4. Membership rose 3 percent during 19X7. This is approximately the same annual rate of increase the club has experienced since it opened and is expected to continue in the future.

5. Membership fees were increased by 15 percent in 19X7. The board has tentative plans to increase the fees by 10 percent in 19X8.

6. Lesson and class fees have not been increased for three years. The board policy is to encourage classes and lessons by keeping the fees low. The members have taken advantage of this policy and the number of classes and lessons have grown significantly each year. The club expects the percentage growth experienced in 19X7 to be repeated in 19X8.

7. Miscellaneous revenues are expected to grow in 19X8 (over 19X7) at the same percentage as experienced in 19X7 (over 19X6).

8. Lesson and class employees' wages and benefits will increase to $291.525. The wages and benefits of regular employees and the manager will increase 15 percent. Towels and supplies, utilities, and miscellaneous expenses are expected to increase 25 percent.

Required:

a. Construct a cash budget for 19X8 for the Triple-F Health Club.

b. Identify any operating problem(s) that this budget discloses for the Triple-F Health Club. Explain your answer.

c. Is the manager's concern that the board's goals are unrealistic justified? Explain your answer.

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TRIPLE-F HEALTH CLUB Statement of Income (Cash Basis) For the Year Ended October 31 (in thousands) 19X7 19X6 Cash revenues: Annual membership fees $355.0 $300.0 Lesson and class fees 234.0 180.0 Miscellaneous 2.0 1.5 Total cash received 591.0 481.5 Cash costs: Manager's salary and benefits 36.0 36.0 Regular employees' wages and benefits 190.0 190.0 Lesson and class employee wages and benefits 195.0 150.0 Towels and supplies 16.0 15.5 Utilities (heat and light) 22.0 15.0 Mortgage interest Miscellaneous Total cash costs 35.1 37.8 2.0 1.5 496.1 445.8 Cash income $ 94.9 $ 35.7