{"id":167,"date":"2015-09-15T16:06:48","date_gmt":"2015-09-15T16:06:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=167"},"modified":"2016-01-01T14:03:23","modified_gmt":"2016-01-01T14:03:23","slug":"cash-budgets","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/cash-budgets\/","title":{"raw":"7.5 Cash Budgets","rendered":"7.5 Cash Budgets"},"content":{"raw":"Cash budget<\/strong> After the preceding analyses have been prepared, sufficient information is available to prepare the cash budget and compute the balance in the Cash account\u00a0for each quarter.\u00a0Preparing a cash budget requires information about cash receipts and cash disbursements from all the other operating budget schedules.\r\n\r\nhttps:\/\/youtu.be\/HT0c22HF5hA\r\n\r\nCash receipts<\/strong> We can prepare the cash receipts schedule based on how the company expects to collect on sales.\u00a0 We know, from past experience, how much of our sales are cash sales and how much are credit sales.\u00a0 We also can analyze past accounts receivable to determine when credit sales are typically paid.\r\n\r\nhttps:\/\/youtu.be\/iYlBGkEBb_E\r\n\r\nLeed Company has determined that all sales are on credit and they do not have any cash sales.\u00a0 For the credit sales, experience tells Leed they will collect 60% of sales in the\u00a0quarter of the sale and the remaining 40% is collected the quarter after the sale (yes, we understand collecting 100% is unlikely but\u00a0Leed chooses to\u00a0budget for 100% collection).\u00a0 Accounts Receivable at the beginning of the year is $200,000 and is expected to be collected in the 1st Quarter.\u00a0 Leed Company prepares the following\u00a0schedule of planned cash receipts:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Schedule of Cash Receipts<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\n<\/tr>\r\n
Budgeted Sales<\/strong><\/td>\r\n$600,000<\/strong><\/td>\r\n$1,600,000<\/strong><\/td>\r\n$800,000<\/strong><\/td>\r\n$1,000,000<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Cash receipts, current quarter (60% x quarter sales)<\/td>\r\n360,000<\/td>\r\n960,000<\/td>\r\n480,000<\/td>\r\n600,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n(600,000 x 60%)<\/td>\r\n(1,600,000 x 60%)<\/td>\r\n(800,000 x 60%)<\/td>\r\n(1,000,000 x 60%)<\/td>\r\n<\/tr>\r\n
Cash receipts, from previous qtr (40% x previous quarter sales)<\/td>\r\n200,000**<\/span><\/td>\r\n240,000<\/span><\/td>\r\n640,000<\/span><\/td>\r\n320,000<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n(600,000 x 40%)<\/td>\r\n(1.600,000 x 40%)<\/td>\r\n(800,000 x 40%)<\/td>\r\n<\/tr>\r\n
Total Cash Collections from Sales<\/td>\r\n$560,000<\/td>\r\n$1,200,000<\/td>\r\n$1,120,000<\/td>\r\n$920,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n**<\/strong> Cash receipts from previous quarter for Quarter 1 comes from the beginning balance in Accounts Receivable.<\/em>\r\n\r\nWe can calculate the ENDING balance of Accounts Receivable for the budgeted balance sheet by taking the 4th Quarter sales $1,000,000 x 40% to be received in 1st Quarter of the next year as $400,000.\u00a0 In addition to cash receipts, we also need to understand how we plan to make our cash payments or disbursements.\r\n\r\nCash disbursements<\/strong> Companies need cash to pay for purchases, wages, rent, interest, income taxes, cash dividends, and most other expenses. We can obtain the amount of each cash disbursement from other budgets or schedules.\r\n\r\nThis video discusses the purchases budget for a merchandiser but if you begin at minute 9 it will pick up with the cash disbursement schedule example.\r\n\r\nLeed Company is a manufacturing company and will need to use the information from the materials purchases budget first.\u00a0 Leed Company makes all material purchases on credit.\u00a0 Leed Company will pay for material purchases 80% in the quarter of purchase and 20% in the quarter after the purchase.\u00a0\u00a0 Accounts\u00a0Payable at the beginning of the year is $80,000 and will be paid in the 1st Quarter.\u00a0We will calculate cash payments for material purchases as shown in the following table.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\n<\/tr>\r\n
Budgeted Material Purchases<\/strong><\/td>\r\n$250,000<\/strong><\/td>\r\n$295,000<\/strong><\/td>\r\n$217,500<\/strong><\/td>\r\n$217,500<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Cash payments, current quarter (80%)<\/td>\r\n$200,000<\/td>\r\n$236,000<\/td>\r\n$174,000<\/td>\r\n$174,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n(250,000 x 80%)<\/td>\r\n(295,000 x 80%)<\/td>\r\n(217,500 x 80%)<\/td>\r\n(217,500 x 80%)<\/td>\r\n<\/tr>\r\n
Cash payments, from previous qtr (20%)<\/td>\r\n\u00a080,000**<\/span><\/td>\r\n50,000<\/span><\/td>\r\n59,000<\/span><\/td>\r\n43,500<\/span><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n(250,000 x 20%)<\/td>\r\n(295,000 x 20%)<\/td>\r\n(217,500 x 20%)<\/td>\r\n<\/tr>\r\n
Total Cash Pmts for Material Purchases<\/strong><\/td>\r\n$280,000<\/strong><\/td>\r\n$286,000<\/strong><\/td>\r\n$233,000<\/strong><\/td>\r\n$217,500<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n**<\/strong> Cash\u00a0payments from previous quarter for Quarter 1 comes from the beginning balance in Accounts Payable.<\/em>\r\n\r\nWe can calculate the ENDING balance of Accounts\u00a0Payable for the budgeted balance sheet by taking the 4th Quarter merchandise purchases of $217,500\u00a0x 20% to be\u00a0paid during 1st Quarter of the next year as $43,500.\u00a0 In addition to these cash payments for merchandise, we also need the cash disbursements from the direct labor budget, manufacturing overhead budget, and selling and administrative budget.\u00a0 Remember, we want the CASH PAYMENT amounts only and not the total budget amount (depreciation is a non-cash expense and is excluded from cash payments).\r\n\r\nhttps:\/\/youtu.be\/I96n57H2p54\r\n\r\nUsing our example, Leed Company, we need the information from the\u00a0cash payments of merchandise we just calculated, cash payments for direct labor (all direct labor paid in the quarter it was incurred), cash payments for manufacturing overhead and cash payments for selling and administrative expenses.\u00a0 But, we also need\u00a0information\u00a0on \u00a0dividends payments, and\u00a0income taxes.\r\n\r\nIncome taxes are assumed to be 40% of budgeted income before income taxes and are paid in the next quarter<\/em>.\u00a0\u00a0 *Income taxes payable on January 1 were $100,000.\u00a0 We assume that\u00a0$40,000 of dividends will be paid in the second quarter and $80,000 in the third quarter.\u00a0 Also, Leed plans to expand operations into a new building that will cost $650,000 in Quarter 4.\u00a0 Leed plans to pay cash for the new building.\r\n\r\nThe complete schedule of cash payments would look like this:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Schedule of Cash Payments<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Total Cash Pmts for Material Purchases<\/td>\r\n280,000<\/td>\r\n286,000<\/td>\r\n233,000<\/td>\r\n217,500<\/td>\r\nfrom schedule above<\/span><\/em><\/td>\r\n<\/tr>\r\n
Budgeted direct labor dollars<\/td>\r\n126,000<\/td>\r\n192,000<\/td>\r\n132,000<\/td>\r\n156,000<\/td>\r\nfrom direct labor budget<\/span><\/em><\/td>\r\n<\/tr>\r\n
Cash payments for mfg overhead<\/td>\r\n80,750<\/td>\r\n89,000<\/td>\r\n81,500<\/td>\r\n80,750<\/td>\r\nfrom mfg overhead budget<\/span><\/em><\/td>\r\n<\/tr>\r\n
Cash payments for selling and admin<\/td>\r\n110,000<\/td>\r\n160,000<\/td>\r\n120,000<\/td>\r\n130,000<\/td>\r\nfrom selling and admin budget<\/span><\/em><\/td>\r\n<\/tr>\r\n
Cash payments for Income Taxes<\/td>\r\n100,000*<\/span><\/td>\r\n57,500<\/td>\r\n270,000<\/td>\r\n100,000<\/td>\r\nfrom budgeted income stmt\r\n<\/span><\/em><\/td>\r\n<\/tr>\r\n
Cash payments for dividends<\/td>\r\n<\/td>\r\n40,000<\/span><\/td>\r\n80,000 <\/span><\/td>\r\n<\/td>\r\ngiven in information above<\/span><\/em><\/td>\r\n<\/tr>\r\n
Cash payment for new building<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n650,000<\/span><\/td>\r\ngiven in information above<\/em><\/span><\/td>\r\n<\/tr>\r\n
Total Cash Payments<\/td>\r\n$696,750<\/td>\r\n$824,500<\/td>\r\n$916,500<\/td>\r\n$1,304,250<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNow let's put it all together in the complete cash budget.\u00a0 The cash budget <\/strong>is a plan indicating expected inflows and outflows of cash.\u00a0 At the simplest form, a Cash budget is:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Beginning Cash Balance<\/td>\r\n<\/tr>\r\n
Add: Cash Receipts<\/td>\r\n<\/tr>\r\n
Cash Available<\/td>\r\n<\/tr>\r\n
Subtract: Cash Payments<\/td>\r\n<\/tr>\r\n
Budgeted Ending Cash Balance<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe can make it a little more complicated by adding financing considerations.\u00a0 The cash budget helps management to decide whether enough cash will be available for short-term needs. If a company's cash budget indicates a cash shortage at a certain date, the company may need to borrow money on a short-term basis. If the company's cash budget indicates a cash excess, the company may wish to invest the extra funds for short periods to earn interest rather than leave the cash idle. Knowing in advance that a possible cash shortage or excess may occur allows management sufficient time to plan for such occurrences and avoid a cash crisis.\r\n\r\nhttps:\/\/youtu.be\/9j48YgH2VfA\r\n\r\nTo illustrate, we will complete the cash budget for Leed Company.\u00a0 On January 1, Leed Company's cash balance was $130,000.\u00a0 We will calculate the cash budget for each quarter using the information from the schedules on this page.\u00a0 We will get our cash receipts from the Schedule of Cash Receipts and the cash disbursements (or payments) from the Schedule of Cash Payments.\r\n\r\nImportant:\u00a0 The ending cash balance of one quarter is the beginning cash balance of the next quarter!<\/strong><\/em>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company<\/strong><\/td>\r\n<\/tr>\r\n
Cash Budget\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\n<\/tr>\r\n
Beginning Cash Balance<\/td>\r\n$130,000<\/td>\r\n$21,250<\/td>\r\n$408,750<\/td>\r\n$612,250<\/td>\r\n<\/tr>\r\n
Add: Cash Receipts (see Schedule of Cash Receipts)<\/td>\r\n$560,000<\/span><\/td>\r\n$1,200,000<\/span><\/td>\r\n$1,120,000<\/span><\/td>\r\n$920,000<\/span><\/td>\r\n<\/tr>\r\n
Cash Available<\/td>\r\n$690,000<\/td>\r\n$1,266,250<\/td>\r\n$1,573,750<\/td>\r\n$1,577,250<\/td>\r\n<\/tr>\r\n
Less: Cash Payments (see Schedule of Cash Payments)<\/td>\r\n$696,750<\/span><\/td>\r\n$824,500<\/span><\/td>\r\n$916,500<\/span><\/td>\r\n$1304,250<\/span><\/td>\r\n<\/tr>\r\n
Budgeted Ending Cash Balance<\/strong><\/td>\r\n-$6,750<\/strong><\/td>\r\n$368,750<\/strong><\/td>\r\n$572,250<\/strong><\/td>\r\n$188,000<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nLeed Company appears to have a little bit of a problem.\u00a0 There is plenty of cash for the year but when we look each quarter, we see we are not planning enough cash to cover the 1st Quarter.\u00a0 We recover in the 2nd quarter and have sufficient cash for the remaining quarters.\u00a0 But what can we do about 1st quarter?\u00a0 We can review the budgets and see if there is anything we can cut or modify.\u00a0 Or, Leed can arrange short term financing with the bank.\u00a0 Leed Company like to keep at a minimum of $10,000 as their ending cash balance each quarter.\u00a0 Leed has arranged a credit line with the bank to access funds on a short term basis.\u00a0 Leed will pay off any loan amount at the next possible quarter and the bank will charge 12% interest per year (3% interest per quarter).\u00a0 How will this change the cash budget if no changes are made to the previous budgets?\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Cash Budget\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\nQtr 1<\/strong><\/td>\r\nQtr 2<\/strong><\/td>\r\nQtr 3<\/strong><\/td>\r\nQtr 4<\/strong><\/td>\r\n<\/tr>\r\n
Beginning Cash Balance<\/td>\r\n$130,000<\/td>\r\n$5,000<\/td>\r\n$368,397<\/td>\r\n$571,897<\/td>\r\n<\/tr>\r\n
Add: Cash Receipts (see Schedule of Cash Receipts)<\/td>\r\n$560,000<\/span><\/td>\r\n$1,200,000<\/span><\/td>\r\n$1,120,000<\/span><\/td>\r\n$920,000<\/span><\/td>\r\n<\/tr>\r\n
Cash Available<\/td>\r\n$690,000<\/td>\r\n$1,205,000<\/td>\r\n$1,488,397<\/td>\r\n$1,491,897<\/td>\r\n<\/tr>\r\n
Less: Cash Payments (see Schedule of Cash Payments)<\/td>\r\n$696,750<\/span><\/td>\r\n$824,500<\/span><\/td>\r\n$916,500<\/span><\/td>\r\n$1,304,250<\/span><\/td>\r\n<\/tr>\r\n
Projected Ending Cash Balance<\/td>\r\n($6,750)<\/td>\r\n$380,500<\/td>\r\n$571,897<\/td>\r\n$187,647<\/td>\r\n<\/tr>\r\n
Add: Short Term Financing Received<\/td>\r\n$11,750<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Less: Short Term Financing Payment<\/td>\r\n<\/td>\r\n($11,750)<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Less: Short Term Financing Interest<\/td>\r\n\u00a0<\/span><\/td>\r\n($353)<\/span><\/td>\r\n\u00a0<\/span><\/td>\r\n\u00a0<\/span><\/td>\r\n<\/tr>\r\n
Budgeted Ending Cash Balance<\/td>\r\n$5,000<\/td>\r\n$368,397<\/td>\r\n$571,897<\/td>\r\n$187,647<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice how Leed borrowed $11,750 in the 1st Quarter to cover the $6,750 shortage + $5,000 minimum we want on hand.\u00a0 Leed plans to pay the loan off during the 2nd quarter by paying the full amount of $11,750 plus interest for 1 quarter (11,750 x 3% per quarter).\r\n\r\n \r\n\r\n \r\n\r\n ","rendered":"

Cash budget<\/strong> After the preceding analyses have been prepared, sufficient information is available to prepare the cash budget and compute the balance in the Cash account\u00a0for each quarter.\u00a0Preparing a cash budget requires information about cash receipts and cash disbursements from all the other operating budget schedules.<\/p>\n