What is the budgeted ending cash balance in February?

Question

Sales in January are expected to be $100,000 and $200,000 in February. Sales are 40% cash. Credit sales are collected 30% in month of sale and 70% in the month following. Cash purchases of inventory in February are estimated to be $40,000, Variable S&A are expected to be 5% of sales, and Fixed S&A are expected to be $10,000( with $2,000 of that amount being depreciation). S&A are paid in the month incurred. There are no other cash transactions expected during February. The beginning cash balance in February was $10,000. What is the budgeted ending cash balance in February?

A) $108,000

B) $110,000

C) $160,000

D) $162,000

E) none of the above

Answer 1

To answer this question, the starting point will be our February cash balance -

Beg. Cash (Feb) --> $10,000

The next step is to look at Cash in-flows from sales. The question tells us the company makes cash sales and also makes credit sales, so we need to determine the February cash received from each sales method.

January: Sales were $100,000; the split is 40% cash ($40,000) and 60% credit ($60,000).

Credit collections occur in the month of sale (30%) and the month after (70%). To find credit collections in February related to January sales we multiply $60,000 by 70% = $42,000

February: Sales were $200,000; 40% of sales were cash ($80,000) and 60% credit ($120,000), from which 30% of credit sales were collected in February ($36,000). Cash in flow in February from February sales in $116,000.

At this point, our cash balance before any outflows is $10,000 + $42,000 + $116,000 = $168,000

Now we calculate the amount of cash outflows in February, which are caused by purchase of inventory and by payment of S&A expenses.

Inventory: Cash purchases of inventory in February are $40,000 [told this in the problem]. No further analysis is needed here.

S&A: There is a fixed portion and a variable portion, and S&A is paid in the month it is incurred. The fixed portion is $10,000. However, this includes $2,000 of depreciation, which is a non-cash expense. This means we must subtract depreciation from the fixed portion to get the cash outflow for Fixed S&A of $8,000. The variable portion is 5% of sales. We multiple $200,000 (sales) by 5.00% which equals $10,000. We add the fixed and variable portions to determine the cash outflow for S&A, which is $18,000.

The final step is to subtract the cash outflows from our cash balance after the cash inflows. To do this we take $168,000 - $40,000 (inventory) - $18,000 (S&A) = $110,000 or B.