Cash budget (Continuation of 6-35) (Appendix)

Refer to the information in Problem 6- 35.
Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only to the public and accepts cash and credit cards; 90% of its sales are to customers using credit cards, for which AG gets the cash right away, less a 2% transaction fee.
Purchases of materials are on account. AG pays for half the purchases in the period of the purchase and the other half in the following period. At the end of March, AG owes suppliers $8,000.
AG plans to replace a machine in April at a net cash cost of $13,000.
Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month incurred except of course depreciation, which is not a cash flow. Depreciation is $25,000 of the manufacturing cost and $10,000 of the nonmanufacturing cost for April.
AG currently has a $2,000 loan at an annual interest rate of 24%. The interest is paid at the end of each month. If AG has more than $10,000 cash at the end of April it will pay back the loan. AG owes $5,000 in income taxes that need to be remitted in April. AG has cash of $5,900 on hand at the end of March.

Required:
1. Prepare a cash budget for April for Animal Gear.
2. Why do Animal Gear's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?

Cash Budget
April 30
Cash balance, April 1 $ 5,900
Add receipts
Cash sales ($178,400 × 10%) 17,840
Credit card sales ($178,400 × 90% × 98%) 157,349
Total cash available for needs (x) $181,089
Deduct cash disbursements
Direct materials ($8,000 + $19,820 × 50%) $ 17,910
Direct manufacturing labor 27,000
Manufacturing overhead ($108,692 ? $25,000 depreciation) 83,692
Nonmanufacturing salaries 16,800
Sales commissions 1,784
Other nonmanufacturing fixed costs ($16,000 ? $10,000 depreciation) 6,000
Machinery purchase 13,000
Income taxes 5,000
Total disbursements (y) $171,186
Financing
Repayment of loan $ 2,000
Interest at 24% ($2,000 24% )
40
Total effects of financing (z) $ 2,040
Ending cash balance, April 30 (x) ? (y) ? (z) $ 7,863

Note: The solution assumes that the loan is repaid. Some students may point out that the cash balance at the end of April is anticipated to be slightly less than $10,000 [$9,903 ($181,089 – $171,186)], and so Animal Gear would not repay the loan. Under this assumption, the $2,000 repayment would not be shown.

2. Animal Gear's managers prepare a cash budget in addition to the operating income budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay operating expenses as these payments come due. Animal Gear could be very profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be delayed and result in insufficient cash being available to make scheduled payments for its expenses. Animal Gear's managers may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be available, so Animal Gear's managers need to prepare a cash budget in addition to an operating income budget.