Chapter 13 – P13-3 Cash Budget
The controller of Shoe Mart Inc. asks you to prepare a monthlycash budget for the next three months. You are presented with thefollowing budget information:
January
February
March
Sales
$450,000
$550,000
$700,000
Manufacturing costs
260,000
330,000
420,000
Selling and administrative expenses
100,000
140,000
150,000
Capital expenditures
—
—
45,000
The company expects to sell about 20% of its merchandise for cash.Of sales on account, 75% are expected to be collected in full inthe month following the sale and the remainder the following month.Depreciation, insurance, and property tax expense represent $40,000of the estimated monthly manufacturing costs. The annual insurancepremium is paid in June, and the annual property taxes are paid inOctober. Of the remainder of the manufacturing costs, 90% areexpected to be paid in the month in which they are incurred and thebalance in the following month. All sales and administrativeexpenses are paid in the month incurred.
Current assets as of January 1 include Cash of $45,000, marketablesecurities of $65,000, and accounts receivable of $290,000($240,000 from December sales and $50,000 from November sales).Sales on account in November and December were $200,000 and$240,000, respectively. Current liabilities as of January 1 includea $50,000, 8%, 90-day note payable due March 20 and $18,000 ofaccounts payable incurred in December for manufacturing costs. Allselling and administrative expenses are paid in cash in the periodthey are incurred. It is expected that $20,000 in dividends will bereceived in January. An estimated income tax payment of $15,000will be made in February. Shoe Mart’s regular quarterly dividend of$5,000 is expected to be declared in February and paid in March.Management desires to maintain a minimum cash balance of$35,000.
Instructions
1. Prepare a monthly cash budget and supporting schedules forJanuary, February, and March.
2. On the basis of the cash budget prepare in part 1, whatrecommendation should be made to the controller?
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