Answer to Question #54647 in Accounting for thanh thanh pham

Question

1. Use the cash budget to prepare a graph of quarterly revenue received, payments made and closing cash position.

2. Explain the graph by answering:

Which month has the highest payments, what causes this?
What advice would you give about the purchase of capital items?
Approximately what effect would not purchasing the capital items have?
Which month has the highest revenue received?
Describe the position of closing cash throughout the year. The owner realises that there will be significant expenses in this first year of operations. Identify in which quarter the milestone of revenues exceeding expenditures occurs. What effect does this have on cash?
What advice would you give about the paying of a $1000 bonus to the junior staff in June promised in the September quarter based on the staffs performance and the financial performance of the business for the year?

Answer 1

The cash budget contains an itemization of the projected sources and uses of cash in a future period. This budget is used to ascertain whether company operations and other activities will provide a sufficient amount of cash to meet projected cash requirements. If not, management must find additional funding sources.
The inputs to the cash budget come from several other budgets. The results of the cash budget are used in the financing budget, which itemizes investments, debt, and both interest income and interest expense.
The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales, accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash expenditures, which comes from the direct materials budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. It may also contain line items for fixed asset purchases and dividends to shareholders.
If there are any unusually large cash balances indicated in the cash budget, these balances are dealt with in the financing budget, where suitable investments are indicated for them. Similarly, if there are any negative balances in the cash budget, the financing budget indicates the timing and amount of any debt or equity needed to offset these balances.