Friendship Products, Inc._Cash Budget
Discuss an everyday application of the scientific method
September 25, 2018SAINT ACC498 module 5 and module 6 discussions
September 25, 2018The controller of Friendship Products, Inc. instructs you to
prepare a monthly cash budget
for the next
three months. You are presented with
the following budget information:
August
September
October
Sales
$ 6,30,000
$ 7,15,000
$ 8,45,000
Manufacturing costs
3,50,000
3,60,000
4,10,000
Selling and Administrative expenses
1,70,000
2,05,000
2,35,000
Capital expenditures
1,50,000
The company
expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are
expected to
be collected in full in the month following the sale and the remainder the
following
month. Depreciation, insurance, and property tax
expense represent $25,000 of the estimated
monthly
manufacturing costs. The annual
insurance premium is paid in July, 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 August 1 include cash of $50,000, marketable securities of
$85,000, and accounts
receivable
of $635,000 ($500,000 from July sales and $135,000 from June sales). Sales on account for
June and
July were $450,000 and $500,000, respectively. Current liabilities as of August 1 include
a $100,000,
15%, 90-day note payable due October 20 and $65,000 of accounts payable
incurred in
July for
manufacturing costs. All selling and
administrative expenses are paid in cash in the period
they are
incurred. It is expected that $1,800
in dividends will be received in August.
An estimated
income tax
payment of $39,000 will be made in September.
Friendship’s regular quarterly dividend
of $12,000
is expected to be declared in September and paid in October. Management desires to
maintain a
minimum cash balance of $40,000.
Instructions
1. Prepare a monthly cash budget and
supporting schedules for August, September, and October.
2. On the basis of the cash budget prepared in
instruction 1, what recommendation should be
made in to the controller?