Answer to Question 1
Cash Budget
April 30
Cash balance, April 1 5,900
Add receipts
Cash sales (178,400 10) 17,840
Credit card sales (178,400 90 98) 157,349
Total cash available for needs (x) 181,089
Deduct cash disbursements
Direct materials (8,000 + 19,820 50) 17,910
Direct manufacturing labor 27,000
Manufacturing overhead (108,692 25,000 depreciation) 83,692
Nonmanufacturing salaries 16,800
Sales commissions 1,784
Other nonmanufacturing fixed costs (16,000 10,000 depreciation) 6,000
Machinery purchase 13,000
Income taxes 5,000
Total disbursements (y) 171,186
Financing
Repayment of loan 2,000
Interest at 24 (2,000 24 )
40
Total effects of financing (z) 2,040
Ending cash balance, April 30 (x) (y) (z) 7,863
Note: The solution assumes that the loan is repaid. Some students may point out that the cash balance at the end of April is anticipated to be slightly less than 10,000 9,903 (181,089 171,186), and so Animal Gear would not repay the loan. Under this assumption, the 2,000 repayment would not be shown.
2. Animal Gear's managers prepare a cash budget in addition to the operating income budget to plan cash flows to ensure that the company has adequate cash to pay vendors, meet payroll, and pay operating expenses as these payments come due. Animal Gear could be very profitable on an accrual accounting basis, but the pattern of cash receipts from revenues might be delayed and result in insufficient cash being available to make scheduled payments for its expenses. Animal Gear's managers may then need to initiate a plan to borrow money to finance any shortfall. Building a profitable operating plan does not guarantee that adequate cash will be available, so Animal Gear's managers need to prepare a cash budget in addition to an operating income budget.
Answer to Question 2
True