QUESTION II LO 7 Cash Budget (12 Marks)

Note to students as this is an open-book assignment (as opposed to a Final exam), students will need to develop the budgets template is not provided.

Cummings Inc., has been accumulating operating data in order to prepare an annual budget. They have determined that a minimum cash balance of $150,000 is required. Any required borrowings take place in increments of $1,000 with annual interest of 8%. Repayment of borrowed funds is also made in increments of $1,000. Assume that borrowings are made on the first day of the month in which the cash is required, and the repayments are made on the last day of a month in which cash is available. On March 1, the cash balance will be $320,000.

Details regarding sales for the first six months of the year are as follows:

January $1,200,000

February 1,300,000

March 1,400,000

April 1,250,000

May 1,440,000

June 1,600,000

Twenty percent (20%) of the above sales are cash sales and 80% are credit sales.

Accounts receivable collection experience is 30% the month of the sale, 40% the month following and 25% the second month following the sale. The remaining receivables are deemed uncollectable for planning purposes.

Budgeted inventory purchases are as follows:

January $480,000

February 520,000

March 560,000

April 500,000

Cummings Inc. pays 50% of their inventory purchases the month of the purchase and 50% the following month.

Budgeted expenses for March and April are as follows:

March April

Advertising 72,000 60,000

Payroll 648,000 518,400

Depreciation 110,000 110,000

Insurance 120,000

Property taxes 80,000

A new truck was required to replace their aging truck. The new truck costing $40,000 was received in March and paid for in cash. They were successful in finding a buyer for their old truck in April and received $15,000 cash.

REQUIRED:

Prepare a cash budget for Cummings Inc. for the months of March and April. Include the calculations that you used to arrive at your entry