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# Complete a cash forecast covering three months

Complete a cash forecast covering three months of business using the included data.

A firm has actual sales of \$65,000 in April and \$60,000 in May. It expects sales of \$70,000 in June, \$100,000 in July, and \$100,000 in August. One quarter (25%) of these sales are cash.
Of the credit sales, 70% are collected one month after the sale. The remaining 30% are collected two months after the sale. Each month the firm purchases inventory equal to 75% of the expected sales and pays for the purchases the following month. Salaries and commissions equal 20% of sales and other cash outflows total \$10,000 per month. The cash balance as of May 31 was \$5,000. The firm wishes to maintain a \$5,000 minimum balance.
Develop the cash budget for the months of June, July, and August.

Sales April May June July August
Cash 16,250
Credit 48,750
Total 65,000 60,000 70,000 100,000 100,000

Collections
Cash sales
Credit sales
1 Mo. Prior (70%)
2 Mo. Prior (30%)
Total Collections

Cash Budget
Beginning Cash 5,000 5,000 5,000
Collections
Total Cash Available

Distributions
Purchases
Salaries
Other
Total Distributions

Minimum Cash Balance 5,000 5,000 5,000
Excess (Deficit)
Cumulative Borrowing

As a financial manager, why is this cash forecast important to you? What problems would an organization face if cash forecasts are not accurate?

#### Solution Preview

A firm has actual sales of \$65,000 in April and \$60,000 in May. It expects sales of \$70,000 in June, \$100,000 in July, and \$100,000 in August. One quarter (25%) of these sales are cash.
Of the credit sales, 70% are collected one month after the sale. The remaining 30% are collected two months after the sale. Each month the firm purchases inventory equal to 75% of the expected sales and pays for the purchases the following month. Salaries and commissions equal 20% of sales and other cash outflows total \$10,000 per month. The cash balance as of May 31 was \$5,000. The firm wishes to maintain a \$5,000 minimum balance.
Develop ...

#### Solution Summary

This solution is comprised of a detailed computation to prepare cash forecast covering three months.

\$2.19