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Cash Budgeting Joan O’Donnell provides the following information in May 2006 - Leaving Cert Accounting - Question 9 - 2006
Question 9
Cash Budgeting Joan O’Donnell provides the following information in May 2006. € Debtors 1/6/2006 (made up of April sales €73,000 and May sales €48,000) 121,000 Cre... show full transcript
Worked Solution & Example Answer:Cash Budgeting Joan O’Donnell provides the following information in May 2006 - Leaving Cert Accounting - Question 9 - 2006
Step 1
Prepare a cash budget on a monthly basis for the period June to October inclusive.
Answer
To prepare the cash budget, we will outline the receipts and payments for each month, followed by calculating the net cash flow, opening bank balance, and closing bank balance for each month.
1. Receipts
- June: Debtors related to April (€73,000) and May (€48,000) total €121,000.
- July: June sales of €83,000.
- August: July sales of €76,000.
- September: August sales of €71,000.
- October: September sales of €97,000.
| Month | Receipts |
|---|---|
| June | €121,000 |
| July | €83,000 |
| August | €76,000 |
| September | €71,000 |
| October | €97,000 |
2. Payments
- June: April creditors (€55,000).
- July: Creditors for June (€44,000).
- August: Creditors for July (€43,000) plus cash purchase of €19,000.
- September: Creditors for August (€58,000).
- October: Creditors for September due (€63,000).
| Month | Payments |
|---|---|
| June | €55,000 |
| July | €44,000 |
| August | €62,000 (€43,000 + €19,000 cash) |
| September | €58,000 |
| October | €63,000 |
3. Net Monthly Cash Flow
Now, we calculate the net cash flow by subtracting payments from receipts for each month:
| Month | Net Cash Flow |
|---|---|
| June | €66,000 (€121,000 - €55,000) |
| July | €39,000 (€83,000 - €44,000) |
| August | €-6,000 (€76,000 - €62,000) |
| September | €13,000 (€71,000 - €58,000) |
| October | €34,000 (€97,000 - €63,000) |
4. Opening and Closing Bank Balance
Now, we will calculate the opening balances, adjusting for overdrafts where applicable:
- June Opening Balance: €-22,000 (beginning overdraft)
- June Closing Balance: €44,000 (€-22,000 + €66,000)
The next month’s opening balance is the previous month’s closing balance.
| Month | Opening Balance | Closing Balance |
|---|---|---|
| June | €-22,000 | €44,000 |
| July | €44,000 | €83,000 |
| August | €83,000 | €77,000 |
| September | €77,000 | €90,000 |
| October | €90,000 | €124,000 |
In conclusion, the cash budget shows varying cash flows, including shortfalls in August, which can be managed through careful expense planning.
Step 2
Indicate what information Joan can get from the prepared cash budget.
Answer
From the prepared cash budget, Joan can gather essential insights:
1. Monthly Surplus/Deficit
Joan can identify her monthly surplus or deficit, crucial for understanding cash flow health.
2. Predict Overdraft Requirements
By analyzing cash flow, she can anticipate overdraft needs throughout the months, allowing planning for financing options.
3. Closing Bank Balances
The final balances at the end of each month give an overview of her available cash, indicating her ability to meet obligations and potential for investments.
4. Strategic Planning
Understanding patterns in income and expenses assists in making informed decisions about future sales strategies and expense management.