The following are three methods of preparing cash budget:
(i) Receipt and Payment Method
(ii) Adjusted Project and Loss Method
(iii) Balance Sheet Method
Receipt and Payment Method
Here cash is received from cash sales, receipt from debtors, sale of fixed assets and investments, issue of shares and debentures. Both capital and revenue receipts are forecasted. The cash is applied for wage payment, salaries, overheads, capital and revenue expenditure are forecasted. It is noteworthy that outstanding payments and accrued incomes are not recorded here.
Prepare a cash budget for the month of May, June and July 2019 on the basis of the following information.
(1). Income and Expenditure Forecasts
(2). Cash balance on 1st May, 2019 $8,000.
(3). Plant costing $16,000 is due for delivery in July, payable 10% on delivery and balance after 3 months.
(4). Advance tax of $8,000 each is payable in March and June.
(5). Period of credit allowed (i) by suppliers – two months and (ii) to customers – one month.
(6). Lag in payment of manufacturing expenses 1/2 month.
(7). Lag in payment of office and selling expenses – one month.
(i). One-half of the manufacturing expenses of April and one-half of May shall be paid in May and so on.
(ii). Office and selling expenses of April shall be paid in May and so on.
Adjusted Profit and Loss Method
Under this method Net profit given is adjusted by adding items of non-fund expenses and deducting non-fund incomes. This method is used for forecasting long term cash requirement. Here cash forecast is made like fund flow statement. Profit is added by non-fund expenses and non-fund incomes are deducted.
The items of addition are as under.
(i) Depreciation, Goodwill written off, Preliminary expenses written off, Loss on sale of fixed Assets, transfer to General Reserves, decrease in the value of Current Assets and increase in the value of current liabilities.
(ii) The items of deductions are: Dividend received, interest on debentures, income from house property, increase in current assets, decrease in current liabilities.
The following is the Balance Sheet of AK Trading Co.:
The following is additional information for the year 2019. Shares were issued for $25,000 and debentures were issued for $5,000. On 31st December 2019 the accrued expenses were $1,250. Debtors $50,000, Creditors $75,000 and Land & building $1,00,000.
Cash Budget Adjusted Profit and Loss account
as on 31-12-2019
Balance Sheet Method
Under this method at the end of Budget period forecast Balance Sheet is prepared in which assets and liabilities are also shown, the difference in both sides of Balance Sheet represents Overdraft or cash balance as the case may be. When assets are less than liabilities then the difference will be Cash Balance. On the other hand when assets are more than liabilities the difference will be Bank Overdraft.
John Trading Company has $1,50,000 Share Capital, $1,8000 as Reserve, $1,20,000 Investment in Fixed Assets, $12,000 as Debtors, $39,000, Creditors $60,000 on 1st Jan. 2019.
To sustain the increase in activity stock level is proposed to be increased by 100% by the end of the year. Machinery to be purchased worth $6,000 during the year. Estimated profit for the year is $21,000 after charging $12,000 depreciation and 50% profit for taxation. Advance income tax is estimated $18,000. Trade creditors are likely to be doubled. 5% dividend is to be paid and provision for the dividend for next year is to be made. Debtors are estimated to be outstanding for 2 months. Sales budget shows sales of $4,50,000.
Make an estimate of cash position by budgeted Cash Balance Sheet as on 31st Dec. 2019.
(1) Previous year loss can be ascertained by preparing opening balance sheet as:
(2). Debtors at the end: