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The following information is budgeted for McCracken Plumbing Supply Corporation for next quarter:

April May June
Sales $110,000 $130,000 $180,000
Merchandise purchases $85,000 $92,000 $105,000
Selling and administrative expenses $50,000 $50,000 $50,000
All sales at McCracken are on credit. Forty percent are collected in the month of sale, 58% in the month following the sale, and the remaining 2% are uncollectible. Merchandise purchases are paid in full the month following the month of purchase. The selling and administrative expenses above include $8,000 of depreciation on display fixtures and warehouse equipment. All other selling and administrative expenses are paid as incurred. McCracken wants to maintain a cash balance of $15,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end.

Required:

Prepare McCracken's cash budget for May. McCracken expects to have $24,000 of cash on hand at the beginning of May.

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Answer:

McCracken's Cash Budget for May:

Beginning Cash balance                                      

Cash Sales: 40% month of sale = $52,000

   58% following month of sale = $63,800         $115,800

Cash Purchases: month following purchase =   ($85,000)

Selling & Administrative Expenses                 =   ($42,000)

Bank Notes                                                       =   $27,000

Cash Balance                                                   =    $15,800

Explanation:

a) Cash Budget is an estimate of the cash receipts and cash payments during a period of time.

b) Depreciation of $8,000 is not a cash payment, so this amount is deducted from the Selling and Administrative Expenses.

c) The bank notes are in multiples of $1,000.  To maintain a cash balance of at least $15,000 for each month, McCracken needed to borrow $1,000 bank loan in 27 notes.

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