Question

Graham Potato Company has projected sales of \(6,000 in September, \)10,000 in October, \(16,000 in November, and \)12,000 in December. Of the company’s sales, 20 percent are paid for by cash and 80 percent are sold on credit.

Experience shows that 40 percent of accounts receivable are paid in the month after the sale, while the remaining 60 percent are paid two months after. Determine collections for November and December.

Also assume Graham’s cash payments for November and December are

\(13,000 and \)6,000, respectively. The beginning cash balance in November is

$5,000, which is the desired minimum balance.

Prepare a cash budget with borrowing needed or repayments for November

and December. (You will need to prepare a cash receipts schedule first.)

Short answer

Cash budget

Particulars	November ($)	December ($)
Total cash receipts	9,280	12,320
Less: Cash payments	13,000	6,000
Net cash balance	(3,720)	6,320
Add: Cash balance at beginning	5,000	5,000
Cash balance at the end	1,280	11,320
Minimum required balance	5,000	5,000
Borrowing	3,720
Repayment		6,320
Net cash balance at the end after borrowing or repayment	5,000	5,000

Step-by-step solution

Cash Budgets

Cash budgets are prepared to estimate the cash flows of the business over the specified period. It is prepared to ensure that there is enough cash is available with the company.

Credit sales and cash sales

	September ($)	October ($)	November ($)	December ($)
Projected Sales	6,000	10,000	16,000	12,000
Cash sales (20%)	1,200	2,000	3,200	2,400
Credit sales (80%)	4,800	8,000	12,800	9,600

Cash receipt schedule

	September ($)	October ($)	November ($)	December ($)
Credit sales (80%)	4,800	8,000	12,800	9,600
40% received after one month		1,920	3,200	5,120
60% received after two months			2,880	4,800
Cash receipt from credit sales			6,080	9,920
Cash receipt from cash sales			3,200	2,400
Total cash receipts			9,280	12,320