91Ó°ÊÓ

Cash budget (continuation of \(6-40\) ). Refer to the information in Problem \(6-40\) Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only to the public and accepts cash and credit cards; \(90 \%\) of its sales are to customers using credit cards, for which AG gets the cash right away, less a \(2 \%\) transaction fee. Purchases of materials are on account. AG pays for half the purchases in the period of the purchase and the other half in the following period. At the end of March, AG owes suppliers \( 8,000\). AG plans to replace a machine in April at a net cash cost of \( 13,000\). Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month incurred except of course depreciation, which is not a cash flow. Depreciation is \( 25,000\) of the manufacturing cost and \( 10,000\) of the nonmanufacturing cost for April. AG currently has a \( 2,000\) loan at an annual interest rate of \(12 \%\). The interest is paid at the end of each month. If AG has more than \( 7,000\) cash at the end of April it will pay back the loan. AG owes \( 5,000\) in income taxes that need to be remitted in April. AG has cash of \( 5,900\) on hand at the end of March. 1\. Prepare a cash budget for April for Animal Gear. 2\. Why do Animal Gear's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?

Step by step solution

01

Cash inflows

The cash inflows for April include the total sales revenue calculated in Step 1. Total Cash Inflows = Total Sales Revenue

02

Cash outflows

Cash outflows for April would include the following: 1. Purchases: 50% payable in April 2. Machine replacement cost: $13,000 3. Labor, other manufacturing, and nonmanufacturing costs: Paid in cash 4. Interest: \(2,000 * 0.12 / 12 = \)20 5. Income taxes: $5,000 Total Cash Outflows = Sum of the above costs #Step 3: Calculate Net Cash Flow and Ending Cash Balance#

03

Net cash flow

To calculate the net cash flow for April, subtract the total cash outflows from the total cash inflows. Net Cash Flow = Total Cash Inflows - Total Cash Outflows

04

Ending cash balance

To find the ending cash balance for April, add the initial cash balance at the end of March to the net cash flow for April. Ending Cash Balance = Initial Cash Balance + Net Cash Flow #Step 4: Loan Repayment# If the ending cash balance is more than $7,000, then AG will pay back the loan. So, we need to account for the loan repayment in the cash budget. 1. If the ending cash balance is > \(7,000, Loan Repayment = \)2,000 2. If the ending cash balance is <= \(7,000, Loan Repayment = \)0 #Step 5: Prepare the Cash Budget for April# Now that we have all the necessary components, we can prepare the cash budget for April by listing the cash inflows, cash outflows, net cash flow, initial cash balance, ending cash balance, and the loan repayment. #Step 6: Explain the importance of cash budget# Animal Gear's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget to ensure they have adequate cash on hand to cover ongoing operating expenses, pay off debts, and make any necessary investments. It helps them identify any potential cash shortages or surpluses and manage their financial activities more effectively.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Financial Planning

Financial planning involves creating a roadmap for managing finances in a business setting. For Animal Gear (AG), this means forecasting cash inflows and outflows to make prudent decisions.
In the context of the cash budget for April, this involves estimating the cash that will be available from sales, understanding when payments for supplies occur, and planning for costs like machine replacement, labor, and taxes.
One of the primary goals of financial planning is to balance income and expenditures to prevent potential cash flow problems. Thus, AG's financial plan ensures they can cover immediate operating costs, invest wisely, and manage debt efficiently.

• Prepare for large expenses and plan for replacements or upgrades of equipment.
• Determine when cash inflows are expected versus when expenses will occur.
• Create strategies for handling unexpected expenses and staying prepared for financial challenges.

By carefully planning finances, AG can set themselves up for long-term stability and growth.

Cash Flow Management

Cash flow management is critical for maintaining liquidity within a company. This process ensures that Animal Gear (AG) has enough cash to meet its obligations as they come due.
Animal Gear's cash flow management requires evaluating cash inflows, like sales revenue, and comparing them against outflows, which include purchases, salaries, taxes, and other operational expenses.
One effective strategy is creating a cash budget to forecast the availability of funds. This allows AG to anticipate periods of surplus or deficit, aiding in better decision-making.

• Calculate inflows from various sources, predominantly credit card sales while accounting for transaction fees.
• Enumerate all predictable cash outflows, including payments to suppliers and loan interests.
• Optimize cash reserves by managing expenses and avoiding cash shortages.

Effective cash flow management prevents financial emergencies and supports the achievement of business objectives. It enables AG to keep operations smooth and manage its financial responsibilities effectively.

Operating Expenses Management

Operating expenses management involves tracking and controlling the costs related to the day-to-day functioning of a business. For AG, this includes the costs of labor, supply purchases, and machine maintenance.
Efficiently managing these expenses helps maintain profitability while ensuring funds are available when needed. It involves closely analyzing each cost component to determine how to optimize spending.
By aligning expenses with revenue, AG ensures that they do not overspend, leading to cash shortages. This balance helps AG sustain operations without resorting to unnecessary debt.

• Monitor cash expenses daily, like immediate labor payments and manufacturing costs.
• Plan for periodic expenses, like tax payments, to prevent budgetary surprises.
• Implement cost control measures, such as evaluating depreciation to understand its non-cash impact on cash flow.

By adopting strategic measures in managing operating expenses, AG ensures operational efficiency and financial health, enabling them to focus resources on business growth and development.