The controller of Mercury Shoes Inc instructs you to prepare

The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following An accounting device used to plan and control resources of operational departments and divisions.budget information:

Prepare a monthly cash budget and supporting schedules for June, July, and August. Enter all amounts as positive numbers except for Cash (decrease) and (deficiency). Use the minus sign to indicate an overall cash decrease and deficiency.

Solution

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QUESTION

The controller of Mercury Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 60% are expected to be collected in the month following the sale and the remainderthe following month ( second month after sale). Deprecation, insurance, and property taxs expense represent 12000 of the estimated monthly manufacturing costs. The anual insurance premium is paid in February, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month.

Current assets as of June 1 include cash of 42000, marketable securities of 25000, and accounts recievable of 198000 (150000 from May sales and 48000 from April sales). Sales on account in April and May were 120000 and 150000, respectively. Current Liabilities as of June 1 include 13000 of accounts payable incurred in May for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. An estimate income tax payment of 24000 will be made in July.Mercury Shoes regular quarterly dividend of 15000 is expected to be declared in July and paid in August. Management desires to maintain a minimum cash balance of 40000.

1 Prepare a monthly cash budget and supporting schedules for June, July, and August 2016.

2 On the basis of the cash budget prepared in part (1) , what recommendation should be made to the controller?

ANSWER:

1)

Mercury Shoes Inc

Cash Budget ($)

For the three months ending 31st August, 2014

June

July

August

Cash receipts from:

Cash sales

16000

18500

20000

Collection of Accounts receivable

138000

146400

157500

Total cash receipts

154000

164900

177500

Estimated Cash payment for:

Manufacturing Costs

56200

66800

88400

selling and Admin. Expenses

40000

46000

51000

Capital Expenditure

120000

Income Tax

24000

Dividends

15000

Total cash disbursements

96200

136800

274400

Excess receipt or (deficiency) over disbursements

57800

28100

-96900

Cash Balance at the beginning of the month

42000

99800

127900

Cash balance at end of month

99800

127900

31000

Minimum cash balance

40000

40000

40000

Excess / deficincy

59800

87900

-9000

Workings

Schedule of collection of cash from sale ($)

Month

Total Credit Sales

Accounts receivable

collected in ($)

June

July

August

April

48000

48000

May

150000

90000

60000

June

144000

86400

57600

July

166500

99900

August

180000

Total Collection

490500

198000

138000

146400

157500

Payment of Manufacturing costs ($)

Month

June

July

August

Manufacturing Costs

66000

82000

105000

Less: depreciation, insurance and property tax

-12000

-12000

-12000

Adjusted manufacturing cost

54000

70000

93000

Paid in the month of incurrence (80%)

43200

56000

74400

paid in the following month (20%)

-

10800

14000

paid the due at the end of May

13000

-

-

Total payment during the month

56200

66800

88400

2) The cash balance at the end of the month of August is $31000, which is less than the minimum desired ending cash balance of $40000. To maintain the ending cash balance at $40000, the company has to borrow an amount of $9000.

	June	July	August
Sales	160000	185000	200000
Manufacturing costs	66000	82000	105000
selling and administrative expenses	40000	46000	51000
Capital expenditures	-	-	120000