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Here are some important figures from the budget of Wise Corporation for the third quarter of 2020: July August September Credit sales $1
Here are some important figures from the budget of Wise Corporation for the third quarter of 2020: July August September Credit sales $1.275.800 $1.483.500 $1,096,300 Credit purchases 765.480 890.160 657,780 Cash disbursements Wages, taxes, and expenses 348,600 395,620 337,150 Interest 29.900 29.900 29.900 Equipment 0 158.900 96.300 Credit sales collections Collected in month of sale 35% Collected month after sale 60% Never collected 5% June credit sales $1,135.020 June credit purchases $ 681,012 Beginning cash balance $ 425,000 All credit purchases are paid in the following month after the purchase. Instructions: a) Using the above information, complete the following cash budget. (15 points)
Beginning cash balance Cash receipts: Cash collections from credit sales Total cash available Cash disbursements: Payments for purchases Wages, taxes, and expenses Interest Equipment urchase Total cash disbursements Ending cash balance b) What are the steps in preparing cash budget? Explain. (5 points)
Beginning cash balance Cash receipts: Cash collections from credit sales Total cash available Cash disbursements: Payments for purchases Wages, taxes, and expenses Interest Equipment purchases Total cash disbursements Ending cash balance
Expert Solution
The cash budget for Wise Corporation is attached in the image.
b) A cash budget is prepared to estimate the inflow and outflow of cash and cash equivalents in an organization for a given period of time in future. Steps involved are-
- A time period is selected for which a cash budget is to be prepared.
- Opening Cash balance is needed to start the calculation
- Probable sources of cash receipts are checked and the amounts are estimated as per past ratios. For example- Collection from customers- 30% of sales of previous month and 70% sale of current month is accounted as receipts for a given month.
- Probable outflows are also identified and recorded. For example- Payment for purchases., wages, interests, taxes etc. The time lag is to be checked and consistently and uniformly maintained throughout the projection.
- The difference between the total of Opening balance and receipts with cash disbursements gives the Closing Cash Balance. (Opening Cash Balance+ Receipts- Cash Disbursements)= Ending Cash Balance
- If total of opening cash balance and receipts is less than total cash disbursements we need to borrow money.
- Certain business also maintain a minimum cash balance for emergenicies.
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