Question:
CASH BUDGET Crash Dobson, former all-state high school football player, owns a retail store that sells new and used sporting equipment. Crash has requested a cash budget for October. After examining the records of the company, you find the following:
a. Cash balance on October 1 is $1,980.
b. Actual sales for August and September are as follows:
|
|
August
|
September
|
|
Cash sales
|
$15,000
|
$ 20,000
|
|
Credit sales
|
80,000
|
90,000
|
|
Total sales
|
$95,000
|
$110,000
|
c. Credit sales are collected over a 3-month period: 50 percent in the month of sale, 30 percent in the second month, and 15 percent in the third month. The remaining sales are uncollectible.
d. Inventory purchases average 70 percent of a month's total sales. Of those purchases, 40 percent are paid for in the month of purchase. The remaining 60 percent are paid for in the following month.
e. Salaries and wages total $2,000 per month.
f. Rent is $2,700 per month.
g. Taxes to be paid in October are $5,000.
h. Crash usually withdraws $4,000 each month as his salary.
i. Advertising is $500 per month.
j. Other operating expenses total $800 per month.
Crash tells you that he expects cash sales of $10,000 and credit sales of $65,000 for October. He likes to have $2,000 on hand at the end of the month and is concerned about the potential October ending balance.
Required:
1. Prepare a cash budget for October. Include supporting schedules for cash collections and cash payments.
2. Did the business meet Crash's desired ending cash balance for October? Assuming that the owner has no hope of establishing a line of credit for the business, what recommendations would you give the owner for meeting the desired cash balance?