Prepare The Expected Cash Collections During August

Prepare the expected cash collections during August, prepare the expected cash disbursements during August, and calculate the expected cash balance on August 31

The following financial information from Tejas WindowTint is needed to prepare the cash budget for August:

  • Sales for July and August: $77,000 and $71,000, respectively
  • Purchases for August are budgeted at $65,000
  • Cash disbursements for expenses for August are forecasted at $14,800
  • Initial cash balance on August 1 is $30,000
  • Collection pattern: 70% in the month of sale, 16% in the month following sale, and 12% in the second month following sale
  • All purchases are on account, and management takes advantage of a 5% discount on purchases paid by the tenth of the following month

Paper For Above instruction

Preparing the cash budget for Tejas WindowTint necessitates meticulous analysis of cash inflows and outflows, centered around accurate projections of collections and disbursements. This process involves calculating expected cash collections from sales, estimating cash disbursements for purchases and expenses, and determining the net cash balance at the end of the period.

Expected Cash Collections During August

The collection pattern indicates that 70% of August sales will be collected in August, 16% of July sales will be collected in August, and 12% of June sales will be collected in August. Using the sales data provided:

  • 70% of August sales: 0.70 × $71,000 = $49,700
  • 16% of July sales: 0.16 × $77,000 = $12,320
  • 12% of June sales: 0.12 × $70,000 = $8,400

Adding these amounts gives the total expected cash collections for August:

Total collections in August = $49,700 + $12,320 + $8,400 = $70,420

Expected Cash Disbursements During August

Cash disbursements include payments for purchases and expenses. Purchases for August are budgeted at $65,000. Since all purchases are on account and management takes advantage of the 5% discount if paid by the tenth of the following month, the payments made in August for July purchases qualify for this discount.

Payment for July purchases of $63,000 would be eligible for a 5% discount:

  • Discount amount: 0.05 × $63,000 = $3,150
  • Payment amount after discount: $63,000 - $3,150 = $59,850

Similar logic applies to August purchases, but since the payments are to be made in August, and the discount applies only if paid by the tenth of the following month (September), the entire $65,000 must be paid in August unless otherwise specified. Given the information, we assume the payments are made without the discount unless paid early; thus, the total is $65,000.

Expenses for August are forecasted at $14,800. Therefore, total disbursements are:

  • Purchases: $65,000
  • Expenses: $14,800

Total disbursements = $65,000 + $14,800 = $79,800

Calculation of Cash Balance on August 31

The initial cash balance on August 1 is $30,000. The net change in cash during August is:

Net cash flow = Total collections – Total disbursements = $70,420 – $79,800 = -$9,380

Therefore, the expected cash balance at the end of August is:

Starting balance + Net cash flow = $30,000 – $9,380 = $20,620

Thus, the projected cash balance on August 31 is approximately $20,620.

Conclusion

Creating a detailed cash budget such as this allows Tejas WindowTint to anticipate cash shortages or surpluses, enabling effective cash flow management. By analyzing collection and disbursement patterns, the company can plan for necessary financing or investment activities to ensure operational stability.

References

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