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Cash Budgeting Sean Burren provided the following information at the end of February 2016: Debtors 01/03/2016 (January sales €62,000 and February sales €74,000) €136,000 Creditors 01/03/2016 €55,000 Bank Balance 01/03/2016 €35,000 Sean expects his sales, purchases and expenses for the next five months to be: Sales March €54,300 April €91,100 May €78,200 June €67,800 July €83,100 Purchases March €38,100 April €38,300 May €27,600 June €24,300 July €38,500 Expenses March €5,000 April €12,000 May €10,000 June €13,000 July €16,000 You are given the following additional information: - All sales are on credit and are paid for two months after the month of sale - Leaving Cert Accounting - Question 9 - 2016
Question 9
Cash Budgeting Sean Burren provided the following information at the end of February 2016: Debtors 01/03/2016 (January sales €62,000 and February sales €74,000) €1... show full transcript
Worked Solution & Example Answer:Cash Budgeting Sean Burren provided the following information at the end of February 2016: Debtors 01/03/2016 (January sales €62,000 and February sales €74,000) €136,000 Creditors 01/03/2016 €55,000 Bank Balance 01/03/2016 €35,000 Sean expects his sales, purchases and expenses for the next five months to be: Sales March €54,300 April €91,100 May €78,200 June €67,800 July €83,100 Purchases March €38,100 April €38,300 May €27,600 June €24,300 July €38,500 Expenses March €5,000 April €12,000 May €10,000 June €13,000 July €16,000 You are given the following additional information: - All sales are on credit and are paid for two months after the month of sale - Leaving Cert Accounting - Question 9 - 2016
Step 1
Prepare a cash budget on a monthly basis for the period March to July inclusive and also the total for the period.
Answer
To prepare a cash budget, we will first outline the cash inflows and outflows for each month from March to July.
Receipts:
-
Debtors:
- March: €62,000 (from January sales)
- April: €74,000 (from February sales)
- May: €54,300 (from March sales)
- June: €91,100 (from April sales)
- July: €78,200 (from May sales)
-
Total Receipts:
- March: €62,000
- April: €74,000
- May: €54,300
- June: €91,100
- July: €78,200
Payments:
-
Cash for Purchases:
- March: €38,100
- April: €38,300
- May: €27,600
- June: €24,300
- July: €38,500
-
Expenses:
- March: €5,000
- April: €12,000
- May: €10,000
- June: €13,000
- July: €16,000
-
Rent:
- March: €1,700
- April: €1,700
- May: €1,700
- June: €1,900
- July: €1,900
-
Equipment:
- June: €18,000
-
Total Payments for Each Month:
- March: €6,700
- April: €84,000
- May: €56,100
- June: €42,200
- July: €38,500
-
Net Cash for Each Month:
- Net Cash = Total Receipts - Total Payments
-
Closing Cash:
- Calculate closing cash for each month: Closing Cash = Opening Cash + Net Cash
Finally, compile the totals for the entire period:
Step 2
Outline two reasons why Sean Burren would complete a cash budget.
Answer
-
Cash Flow Management: A cash budget helps Sean monitor and manage his cash inflows and outflows effectively, ensuring that he has sufficient funds to meet his obligations as they arise. By forecasting his cash flow, he can avoid any potential shortfalls and plan for future expenses.
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Financial Planning: Completing a cash budget allows Sean to identify periods of surplus or deficit. This information is crucial for making informed financial decisions, such as whether he needs to arrange for additional financing or investments in equipment, thus aiding in long-term financial planning.