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    Cash Budget

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    Kai
    A cash budget is prepared to determine if a company will need cash during an accounting period, estimate the amount needed, and when. It shows expected cash receipts and disbursements by period. The cash budget includes cash receipts from collections, loans, and stock; cash disbursements like payments to suppliers and loans; net cash flow; target cash balance; and cumulative excess cash or funding needed. To prepare the budget, assumptions are made based on historical performance and management plans.

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    Cash Budget

    Uploaded by

    Kai
    500 views2 pages
    A cash budget is prepared to determine if a company will need cash during an accounting period, estimate the amount needed, and when. It shows expected cash receipts and disbursements by period. The cash budget includes cash receipts from collections, loans, and stock; cash disbursements like payments to suppliers and loans; net cash flow; target cash balance; and cumulative excess cash or funding needed. To prepare the budget, assumptions are made based on historical performance and management plans.

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    Cash Budgeting

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    A cash budget is prepared to determine if a company will need cash during an accounting period, estimate the amount needed, and when. It shows expected cash receipts and disbursements by period. The cash budget includes cash receipts from collections, loans, and stock; cash disbursements like payments to suppliers and loans; net cash flow; target cash balance; and cumulative excess cash or funding needed. To prepare the budget, assumptions are made based on historical performance and management plans.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    500 views2 pages

    Cash Budget

    Uploaded by

    Kai
    A cash budget is prepared to determine if a company will need cash during an accounting period, estimate the amount needed, and when. It shows expected cash receipts and disbursements by period. The cash budget includes cash receipts from collections, loans, and stock; cash disbursements like payments to suppliers and loans; net cash flow; target cash balance; and cumulative excess cash or funding needed. To prepare the budget, assumptions are made based on historical performance and management plans.

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    Cash Budget

    To find out if the company will be in need of cash in the accounting period and to have an
    estimate of how much is needed and at what particular period that need will arise, a cash budget
    must be prepared. A cash budget shows the expected cash receipts and disbursements for an
    accounting period. It can be prepared on a monthly or a quarterly basis for a year.
    The cash budget has the following parts:
    1. Cash receipts. This includes collections from receivables, proceeds from loans or issuance
    of new shares of stocks and advances from stockholders.
    2. Cash disbursements. This section includes payments to suppliers and other service
    providers, payments for loans and cash dividends.
    3. Net cash flow for the period. This is computed by deducting cash disbursements from the
    collection for the period. This provides information regarding the excess cash or cash
    deficit for the period.
    4. Target cash balance. No business can operate without cash. This target cash balance is
    the amount of cash that management wants to maintain at all times given its present level
    of operations, stability of cash flows, and the macroeconomic and political conditions.
    There are primary and secondary reasons for holding cash which will be discussed later.
    5. Cumulative excess cash or funding requirements. This is the most important part of the
    cash budget where the possible funding requirements are shown on a cumulative basis.
    This part of the cash budget is very important in planning because if the management
    cash estimate the amount of cash they will need in the future and when it will possibly
    arise, this early, management can identify the possible sources of cash. Planning the
    possible sources of cash in advance will save the company financing costs and the
    unnecessary stress for managers.

    A good problem to deal with is cumulative excess cash. If the company has excess cash,
    then management can decide where to invest the excess funds to generate more
    investment income for the company.

    To prepare a cash budget, assumptions have to be made. These assumptions must be


    based on the historical performance of the company and plans of the management.
    Illustrative Example: It was December 2014 and the president of DCD Corporation wanted to find
    out if the company has enough cash to pay the principal balance of the company’s loan worth ₱3
    million by the end of 2015. He asked the chief accountant to prepare a cash budget for 2015.
    The following assumptions which will be used for the preparation of the cash budget for
    2015 are as follows:
    1. Projected quarterly sales for 2015 are as follows:
    First quarter - ₱5 million
    Second quarter - ₱7.5 million
    Third quarter - ₱8.5 million
    Fourth quarter - ₱10 million
    Fourth quarter sales in 2014 was ₱8 million.
    Ninety percent of the sales are collected in the quarter the sales are made. The remaining
    10% is collected the following quarter.
    2. Cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these
    are sold. All merchandise purchased in the quarter are paid in the same quarter.
    3. Operating expenses for each quarter paid in cash are as follows:
    First quarter - ₱500,000
    Second quarter - ₱750,000
    Third quarter - ₱850,000
    Fourth quarter - ₱1,000,000
    On top of these cash operating expenses, depreciation expense to be charged to
    operations is ₱150,000 per quarter.
    4. Interest expense paid every quarter is ₱75,000.
    5. Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
    First quarter - ₱225,000
    Second quarter - ₱157,500
    Third quarter - ₱270,000
    Fourth quarter - ₱315,000
    6. Expected cash balance at the end of 2014 is about ₱350,000. For 2015, target cash balance
    is raised to ₱500,000 each quarter because of expected increase in sales.

    Given the above assumptions, a cash budget can now be prepared for 2015.

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