Question

Roller Catering is a distributor of catering equipment. The company is in the process of putting together its cash budget for the second quarter-April, May, and June of next year. The president of the company suspects that some financing will be required in the second quarter because sales are expanding and the company intends to make several major equipment purchases in that quarter. The president is confident that the company will be able to meet or exceed the following budgeted sales figures next year:

January $158,000 July $190,000

February $160,000 August $192,000

March $164,000 September $210,000

April $172,000 October $230,000

May $176,000 November $260,000

June $184,000 December $180,000

The following additional information will be used in formulating the cash budget:
A) The company collects 30% of its billings in the month after the sale and the remaining 70% in the second month after the sale.
B) The cost of sales is 75% of sales. They order goods one month in advance of their expected sales.
C) Desired ending inventory is kept to a minimum.
D) Half of the purchases made are paid one month after it orders, and the other half paid 2 month after it places the order.
E) Operating expenses other that cost of sales are $178,800 for the year. It includes Salaries of $120,000, advertising $12,000, property taxes $18,000, insurance $4,800, utilities $6,000, Depreciation $18,000.
F) Income tax payments are made by the company in the first month of each quarter based on the taxable income for the prior quarter. The income tax payment due in April is $16,000.
G) Because of expanding sales, the company plans to purchase $22,300 of equipment in April and $29,000 in May. These purchases will not affect depreciation for the year.
H) The end of the month cash balance cannot fall below $20,000.
I) All borrowing is done at the beginning of the month, and all investments and repayments are made at the end of the month. As of May 31st, there are no investments of excess cash and no outstanding loans.
J) The annual rate on loans from the bank is 12%. (or 1% per month). The company will pay off any loans, including accumulated interest, at the end of the second quarter if sufficient cash is available.

REQUIRED
Prepare a cash budget by month and in total for the second quarter.

Answer 1

I don't understand, is this a question?

Answer 2

A cash budget for Roller Catering involves calculating cash collections based on their billing cycle, planning the purchases to match expected sales, accounting for operating expenses, equipment purchases, and income tax payments. The end-of-month cash balance dictates any necessary financing, and any loans taken must be repaid by the end of the quarter with any accumulated interest, considering their interest rate is 1% per month.

Step-by-step explanation:

Cash Budget for Roller Catering for the Second Quarter

Let’s first calculate the cash collections from sales for each month in the second quarter. Remember Roller Catering collects 30% in the first month following a sale and the remaining 70% in the second month.

• April’s collection includes: 30% of March ($164,000 * 0.3 = $49,200) + 70% of February ($160,000 * 0.7 = $112,000)
• May’s collection includes: 30% of April ($172,000 * 0.3 = $51,600) + 70% of March ($164,000 * 0.7 = $114,800)
• June’s collection includes: 30% of May ($176,000 * 0.3 = $52,800) + 70% of April ($172,000 * 0.7 = $120,400)

Now, let's calculate the purchases for each month based on 75% of next month’s sales (as they order one month in advance), with payment split equally between the subsequent two months:

• April purchases (for May sales): $176,000 * 0.75 / 2 = $66,000
• May purchases (for June sales): $184,000 * 0.75 / 2 = $69,000
• June purchases (for July sales): $190,000 * 0.75 / 2 = $71,250

Operating expenses other than the cost of goods sold are $178,800 for the year, or $14,900 per month. The income tax payment due in April is $16,000. The company also has equipment purchases of $22,300 in April and $29,000 in May.

The minimum end-of-month cash balance is $20,000. Borrowing is done at the beginning of the month if necessary at a 12% annual rate, which is 1% monthly.

Summary of the Cash Budget

We can summarize the cash budget by adding monthly collections, deducting monthly purchases, operating expenses, equipment purchases, and tax payments. The end-of-month cash balance will determine if the company needs financing.

Consideration of Loan Repayment

If Roller Catering had to borrow money due to insufficient cash, they intend to repay loans, including accrued interest, at the end of the second quarter, provided there are sufficient funds.