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Cash Budgeting: The LBJ Company

The LBJ Company has budgeted sales revenues as follows:

April may June

Credit sales $94000 $89500 $75000
Cash sales $48000 $75000 $57000
Total sales $142000 $164500 $132000

Past experience indicates that 30% of the credit sales will be collected in the month of sale and the remaining 70% will be collected in the following month.

Purchases of inventory are all on credit and 40% is paid in the month of purchase and 60% in the month following purchase. Budgeted inventory purchases are $19500 in April, $135000 in May, and $63000 in June.

Other budgeted cash receipts: a) sale of plant assets for $33000 in May, and b) sale of new common stock for $50000 in June. Other budgeted cash disbursements :a) operating expenses of $ 15000 each month, b)selling and administrative expenses of $10,150 each month, c) purchase of equipment for $ 19000 cash in June and d) dividends of $20000 will be paid in June.

The company has a cash balance of $20000 at the beginning of May and wishes to maintain minimum cash balance of $20000 at end of each month. An open line of credit is available at the bank of carries and annual interest rate of 10%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available also assume that there is no outstanding financing as of May 1.

Requirements: Use this information to prepare a cash budget for the month of May and June.

Solution Preview

Please see the attached Excel 97-2003 spreadsheet.

May June
Cash receipts:
Cash sales $75,000 $57,000
Proceeds of asset sales 33,000
Proceeds of stock issuance 50,000
Collections on accounts ...

Solution Summary

This solution illustrates how to construct a cash budget and determine whether a company must borrow funds.