Prepare a monthly Cash Budget in tabular form for the months of February, March and April; showing the bank balance at each month's end.
Company Information and Background
The following data is available from the various functional budgets prepared at Congo Limited.
JanuaryFebruaryMarchApril
$'000 $'000 $'000 $'000
CASH SALES 128 84 72 90
Credit Sales 1,140 760 640 800
Purchases for Resale 880 560 520 320
Salaries and Wages 266 280 238 248
Overhead Expense 160 150 160 140
Other information is available as follows:
1.5% of all sales on credit are expected to become bad debts. Receipts from credit customers are due in the month following sale.
2.All goods are bought on credit from suppliers who allow 2½% cash discount for payment in the month following purchase.
3.Salaries and wages are paid in the month in which they are earned.
4.Payments for overhead expenses are made in the month following the month in which expenses are incurred. The above overhead budget includes $28,000 per month for depreciation.
5.Two new vans costing $21,000 each are to be paid for in April.
6.Taxation amounting to $175,000 is to be paid in March.
To prepare a monthly Cash Budget in tabular form for the months of February, March, and April, you need to consider the cash inflows and outflows for each month based on the given information. Here's how you can calculate the cash budget:
Step 1: Calculate the Cash Inflows
a. Start with the cash sales for each month. These are the sales made for cash.
b. Calculate the collections from credit sales for each month. These are the payments received from customers for credit sales in the previous month (assuming a one-month credit period).
c. Add cash sales and collections from credit sales to get the total cash inflows for each month.
Step 2: Calculate the Cash Outflows
a. Consider the purchases for resale for each month. These are the expenses incurred for buying goods on credit.
b. Calculate the payments to suppliers by deducting the cash discount (2.5% of purchases) from the total purchases for each month.
c. Add salaries and wages for each month. These are the payments made to employees in the month they are earned.
d. Add overhead expenses for each month. These are the expenses incurred for running the business.
e. Deduct the amount of depreciation included in the overhead expenses to get the cash outflows.
Step 3: Calculate the Ending Bank Balance
a. Begin with the bank balance at the end of January as the starting point.
b. Add the total cash inflows for each month.
c. Deduct the total cash outflows for each month.
d. Calculate any additional cash outflows, such as the payments for new vans and taxation.
e. Adjust the bank balance based on these additional cash outflows.
f. Repeat the process for each month to calculate the ending bank balance.
Here's a table to represent the monthly Cash Budget:
| | February | March | April |
|-------|------------|----------|---------|
| Cash Inflows | | | |
| Cash Sales | 128 | 84 | 72 |
| Collections from Credit Sales | 1,140 | 760 | 640 |
| Total Cash Inflows | 1,268 | 844 | 712 |
| Cash Outflows | | | |
| Purchases for Resale | 880 | 560 | 520 |
| Payments to Suppliers (after discount) | 857.5 | 546 | 505 |
| Salaries and Wages | 280 | 238 | 248 |
| Overhead Expenses (excluding depreciation) | 150 | 160 | 140 |
| Additional Cash Outflows: | | | |
| Payments for New Vans | - | - | 42 |
| Payments for Taxation | - | 175 | - |
| Total Cash Outflows | 2,167.5 | 1,719 | 1,455 |
| Ending Bank Balance | -899.5 | -875 | -743 |
Please note that the ending bank balance for all the months is negative, indicating a cash shortfall. You may need to consider additional financing or make adjustments to your budget to ensure sufficient cash flow.