Assignment 2 – preparing a cash budget
.
1. Select an assumption for each the following values that fall between the minimum and
maximum indicated.
Assumption
Minimum Maximum
a. Sales in month 1
$150,000
$250,000
b. Increase/decrease in sales month 2
-$5,000
$10,000
c. Increase/decrease in sales month 3
-$5,000
$10,000
d. Increase/decrease in sales month 4
$40,000
$60,000
e. Increase/decrease in sales month 5
$10,000
$30,000
f. Increase/decrease in sales month 6 (compared to month 3)
-$5,000
$10,000
g. Portion of sales that are cash sales or are collected in month of
25%
35%
sale
h. Portion of sales for which receivables are collected in the first
40%
50%
month following the month of sale
i. Fixed monthly expenses
$60,000
$70,000
j. Portion of variable expenses that are paid in cash or in month of
35%
45%
purchase
k. Portion of variable expenses that are paid in the first month
40%
50%
following the month of purchase
l. Interest payment, in months 2 and 5
$20,000
$30,000
m. Dividend payment, in months 3 and 6
$10,000
$20,000
n. Semi-annual insurance premium payment in month 4
$15,000
$35,000
Use these assumptions, in addition to those selected above:
Variable monthly expenses equal 70% of sales in the following month
Total time 0 accounts receivable: $190000
Total time 0 accounts payable: $56250
Time 0 accounts receivable collected in month 1: $140000
Time 0 accounts receivable collected in month 2: $50000
Time 0 accounts payable paid in month 1: $45000
Time 0 accounts payable paid in month 2: $11250
Expected sales in month 7: $200,000
Beginning cash balance for month 1: $5000
All non-cash sales not collected in either the month of sale or the following month are collected
in the second month after the sale, and all variable costs not paid in cash or in the month after
purchase or the following month are paid during the second month after purchase.
2. Using the information from question 1, prepare a six-month cash budget for the company.
Your cash budget should include the following lines with appropriate calculation of amounts for
each of the six months:
Sales
Cash sales
Accounts receivable collected from the previous month’s sales
Accounts receivable collected from sales two months ago
Total cash inflow
Fixed expenses
Variable expenses
Variable expenses paid in month incurred
Accounts payable paid in month following purchase
Accounts payable paid in second month after purchase
Interest payments
Insurance payments
Dividend payments
Total cash outflow
Net cash flow for the month
Beginning cash balance
Ending cash balance
Accounts receivable (beginning of month)
Accounts payable (beginning of month)
3. Explain how the information in the “net cash flow for the month” and “ending cash balance”
line helps the company’s financial manager in planning for the next six months. Your
explanation should be specific to the findings in your cash budget.