You have just been contracted as a budget consultant by LBJ Company, a distributor of bracelets to various retail outlets across the country. The company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash.

You have decided to create a cash budget for the upcoming fourth quarter in order to show management the benefits that can be gained from proper cash planning.You have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of bracelets, but all are sold for the same $10 price. Actual sales of bracelets for the last three months and budgeted sales for the next six months follow (shown in number of units):

July (actual)

20,000

August (actual)

26,000

September (actual)

40,000

October (budget)

70,000

November (budget)

110,000

December (budget)

60,000

January (budget)

30,000

February (budget)

28,000

March (budget)

25,000

The concentration of sales in the fourth quarter is due to the Christmas holiday. Sufficient inventory should be on hand at the end of each month to supply 40% of the bracelets sold in the following month.

Suppliers are paid $4 for each bracelet. Fifty-percent of a month's purchases is paid for in the month of purchase; the other 50% is paid for in the following month. All sales are on credit with no discounts. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below.

Variable expenses:

Sales commissions 4% of sales

Fixed expenses:

Advertising $220,000

Rent$20,000

Salaries$110,000

Utilities$10,000

The company plans to purchase $22,000 in new equipment during October and $50,000 in new equipment during November; both purchases will be for cash. The company declares dividends of $20,000 each quarter, payable in the first month of the following quarter.

Other relevant data is given below:

Cash balance as of September 30 $74,000

Merchandise purchases for September$200,000

The company maintains a minimum cash balance of at least $50,000 at the end of each month. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. When able, the company will pay the bank all of the accrued interest on the loan and as much of the loan principal as possible while still retaining at least $50,000 in cash.

Required:

create a cash budget for the three-month period ending December 31 using the Excel template provided. Save and submit your completed work product to the appropriate part of the online course shell.

Template

SALES BUDGET:

OctoberNovemberDecemberQuarter

Budgeted unit sales

Selling price per unit

Total sales

SCHEDULE OF EXPECTED CASH COLLECTIONS:

OctoberNovemberDecemberQuarter

August sales

September sales

October sales

November sales

December sales

Total cash collections

MERCHANDISE PURCHASES BUDGET:

October November December Quarter

Budgeted unit sales

Add desired ending inventory

Total needs

Less beginning inventory

Required purchases

Cost of purchases @ $4 per unit

BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES:

October November December Quarter

September purchases

October purchases

November purchases

December purchases

Total cash payments

LBJ COMPANY

CASH BUDGET

FOR THE 3 MONTHS ENDING DECEMBER 31

October November December Quarter

Cash balance

Add collections from customers

Total cash available

Less disbursements:

Merchandise purchases

Advertising

Rent

Salaries

Commissions

Utilities

Equipment purchases

Dividends paid

Total disbursements

Excess (deficiency) of receipts

over disbursements

Financing:

Borrowings

Repayments

Interest

Total financing

Cash balance, ending