Cash Budgets (Cambridge International A-Level Accounting)

Spec point — how to prepare the following budgets: – cash

Cash budgets

How to prepare a cash budget?

• The cash budget shows all the projected **money coming in **and going out
• The cash budget includes all transactions relating to cash, cheque and** bank transactions**
• Here is an example of the cash budget

Example of a cash budget

• STEP 1 Calculate the receipts for each period

  • This may include:

    • Receipts of cash sales
    • Receipts from credit sales
    • Sale of non-current assets
    • Capital
    • Loans

• STEP 2 Calculate the payments for each period

  • This may include:

    • Payment of cash purchases
    • Payments for credit purchases
    • Purchase of non-current assets
    • Drawings
    • Loan repayments
    • Cash expenses only

• STEP 3 Calculate the net receipts or payments by using this formula

  • Total receipts - total payments

• STEP 4 Write down the opening balance

  • This is the same as the closing balance for the previous month
  • Brackets indicate that the bank is overdrawn

• STEP 5 Find the closing balance

  • Add the net cash flow to the opening balance

Exam Hint If depreciation is included in the expenses, then you need to subtract it from the total. Depreciation does not affect the cash budget.

Worked Example Cushions manufacture a range of cushions. Here is the following information relating to a cash budget:

	January	February	March
Sales $	60 000	58 000	66 000
Purchases $	30 000	28 000	31 000
Expenses (including depreciation)	15 000	12 000	12 000

Additional information

• 40% of sales are made on cash basis. The remaining 60% of customers will pay one month later. Sales in December are expected to be $40 000.
• Payments to suppliers are made one month later. The purchases expected in December is to be $20 000.
• Expenses are paid in the month they are incurred.
• The opening balance in January is expected to be $3 000 overdrawn.
• Depreciation for existing non-current assets for the year is $12 000.
• In February a new van was purchased for $17 000. The policy is that vehicles are not depreciated in the year of purchase.
• Loan repayments will be $1 500 each month starting in February

Prepare the cash budget for January, February and March

Answer

• Calculate the receipts for all three months

  • Sales:

January

Cash sales = 40% × $60 000 = $24 000

Credit sales = 60% × $40 000 = $24 000

February

Cash sales = 40% × $58 000 = $23 200

Credit sales = 60% × $60 000 = $36 000

March

Cash sales = 40% × $66 000 = $26 400

Credit sales = 60% × $58 000 = $34 800

• Calculate the payments for all three months

  • Purchases January = $20 000 February = $30 000 March = $28 000
  • Expenses

Depreciation for the month = $12 000 ÷ 12 = $1 000 per month January = $15 000 - $1 000 = $14 000 February = $12 000 - $1 000 = $11 000 March = $12 000 - $1 000 = $11 000

The answer will be presented as the following cash budget:

	January $	February $	March $
Receipts
Cash sales	24 000	23 200	26 400
Credit customer - one month	24 000	36 000	34 800
Total receipts	48 000	59 200	61 200
Payments
Credit suppliers - one month	20 000	30 000	28 000
Expenses	14 000	11 000	11 000
Van		17 000
Loan repayment		1 500	1 500
Total Payments	34 000	59 500	40 500
Net receipts or payments	14 000	(300)	20 700
Opening balance	(3 000)	11 000	10 700
Closing balance	11 000	10 700	31 400