P5-65A. (Learning Objective 3: Preparing a cash budget and using cash-flow information)

John Watson, chief financial officer of Scott Wireless, is responsible for the company’s budgeting process. Watson’s staff is preparing the Scott cash budget for 20X7. A key input to the budgeting process is last year’s statement of cash flows, which follows (amounts in thousands):

Requirements 1. Prepare the Scott Wireless cash budget for 20X7. Date the budget simply “20X7” and denote the beginning and ending cash balances as “beginning” and “ending.” Assume the company expects 20X7 to be the same as 20X6, but with the following changes:

a. In 20X7, the company expects a 12% increase in collections from customers and a 25%
increase in purchases of inventory.

b. There will be no sales of investments in 20X7.

c. Scott plans to issue no shares in 20X7.

d. Scott plans to end the year with a cash balance of $3,500 (thousand).
2. Does the company’s cash budget for 20X7 suggest that Scott is growing, holding steady, or decreasing in size? (Challenge)

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A1 Scott Wireless Statement of Cash Flows 20X6 1 2 (In thousands) 3 Cash Flows from Operating Activities 4 Collections from customers $64,000 5 Interest received 300 679 Purchases of inventory (49,000) Operating expenses (13,500) 8 Net cash provided by operating activities 1,800 10 9 Cash Flows from Investing Activities Purchases of equipment (4,800) 11 Purchases of investments (400) 12 Sales of investments 500 13 Net cash used for investing activities (4,700) 14 Cash Flows from Financing Activities 15 Payment of long-term debt (400) 16 Issuance of shares 1,700 17 Payment of cash dividends (300) 18 Net cash provided by financing activities 1,000 19 Cash 20 Increase (decrease) in Cash (1,900) 21 Cash, beginning of year 3,400 22 Cash, end of year $ 1,500 23