Cash Budget: Videos & Practice Problems
A Cash Budget brings together the parts of the master budget that affect cash so a business can see whether incoming cash will be enough to cover cash disbursements and avoid liquidity shortages. Because many transactions involve credit, accountants first prepare simple intermediate schedules that track when cash actually enters or leaves the bank account rather than when revenue or cost is recorded.
The main inflow schedule is the cash collections budget, which summarizes cash sales, collections from prior-period credit sales, and total cash collections. On the payment side, separate schedules summarize direct materials payments, direct labor payments, and manufacturing overhead payments. Direct materials often require a timing shift when purchases are paid later, while direct labor may be paid in the same period. For manufacturing overhead, non-cash depreciation must be removed to find cash paid, using \( \text{Cash payments for MOH} = \text{Total MOH cost} - \text{Depreciation} \).
Overview of the Cash Budget
Which statement best explains the main importance of preparing a cash budget?
To help managers present the company's net worth to investors to obtain more financing.
To help managers ensure sufficient funds to meet obligations and avoid liquidity shortages.
To help managers determine how much dividends will be paid to shareholders.
To help managers record all actual cash transactions after they occur during the period.
Intermediate Documents: Cash Collections Budget
Intermediate Documents: Cash Collections Budget
A furniture maker has set the following budgeted sales for the coming three months:
It is also projected that 60% of total sales would come from credit sales that can be collected a month after the sale is made. What is the total amount of cash expected to be received from customers for the month of May?
\$90,000
\$100,000
\$105,000
\$110,000
Intermediate Documents: Cash Disbursements (Product Costs)
Intermediate Documents: Cash Disbursements (Product Costs)
Intermediate Documents: Cash Disbursements (Product Costs)
A furniture maker has set the following budgeted product costs for the coming three months:
\$500 in manufacturing overhead costs is payable one month later, while labor costs and the remaining manufacturing overhead must be paid at the end of the month. Also, direct materials purchases carry 1-month credit terms. Calculate the total cash payments for product costs for the month of May.
\$36,860
\$38,000
\$37,500
\$37,360
Intermediate Documents: Cash Disbursements (Other Costs)
Intermediate Documents: Cash Disbursements (Other Costs)
Intermediate Documents: Cash Disbursements (Other Costs)
Is it always required that operating expenses be paid in the same period as they are incurred?
Yes, because direct materials purchases are usually settled immediately upon delivery.
No, because payment timing depends on agreed terms, not just when the cost is recognized.
Yes, because all period costs must be expensed immediately.
No, because manufacturing overhead amounts may be paid later depending on supplier arrangements.
Combined Cash Budget
Combined Cash Budget
A furniture maker has set the following expected cash data for the month of May:
Does the furniture maker need to acquire financing at the end of May?
No, the furniture maker has a positive ending cash balance.
Yes, the furniture maker needs financing equal to \$8,000.
Yes, the furniture maker needs an additional finance of \$150.
No, the furniture maker has an ending cash balance greater than its beginning cash balance.
Here's what students ask on this topic:
A cash budget is a crucial part of the master budget that helps a business determine if it has enough incoming cash to cover all cash disbursements. Unlike other budgets that record revenue or costs when they are earned or incurred, the cash budget focuses on the actual timing of cash inflows and outflows. This is important because many transactions involve credit, meaning cash is received or paid at different times than when the transaction is recorded. The cash budget consolidates information from various parts of the master budget to provide a clear picture of cash availability, helping the business avoid liquidity shortages and manage its cash flow effectively.
Intermediate documents simplify the cash budget preparation by condensing complex budget information into straightforward schedules that track actual cash movements. For example, the sales budget, which can be very detailed, is simplified into the cash collections budget, showing when cash from sales is received. Similarly, budgets for direct materials, direct labor, and manufacturing overhead are converted into payment schedules that indicate when cash leaves the business. These intermediate documents focus only on cash inflows and outflows, making it easier to compile the overall cash budget without getting overwhelmed by the complexity of the full master budget.
The cash collections budget is an intermediate document derived from the sales budget that shows when cash is actually received from sales. It includes three key pieces of information: cash sales made during the current quarter, collections from credit sales made in previous quarters, and the total cash collections for the quarter. This budget helps track the timing of cash inflows, especially because credit sales are collected later, often in the following quarter. By summarizing these cash receipts, the cash collections budget provides a clear view of cash inflows for the cash budget.
Direct materials payments are tracked using an intermediate document called the direct materials payments schedule. This schedule shows the total cost of direct materials purchased and when the cash actually leaves the business to pay for them. Often, materials are bought on credit, so the cash payment occurs in a later period than the purchase. For example, if materials are purchased in quarter 1 but paid for in quarter 2, the payment schedule reflects this timing. This helps accurately match cash outflows with the periods when cash is disbursed, rather than when the materials were ordered.
Depreciation is a non-cash expense included in manufacturing overhead costs, representing the allocation of the cost of equipment over time. Since it does not involve an actual cash outflow, it must be excluded when calculating cash payments for manufacturing overhead. The cash payments for manufacturing overhead are calculated by subtracting depreciation from the total manufacturing overhead cost, as shown in the formula: . This ensures the cash budget only reflects actual cash disbursements.
