Treasury management vs Cash management Answer to Warm up Exercises

Problem 1
From the following information, prepare cash budget for the month of January to April:

Expected Sales Expected Purchase

$ $
Jan. 60,00 Jan. 48,000
0
Feb. 40,00 Feb. 80,000
0
Mar. 45,00 Mar. 81,000
0
Apr. 40,00 Apr. 90,000
0

Wages to be paid to workers Rs. 5,000 each month. Balance at the bank on 1st Jan. $8,000.
It has been decided by the Management that:
(i) In case of deficit fund within the limit of $10,000 arrangements can be made with bank.
(ii) In case of deficit fund exceeding Rs. 10,000 but within the limits of $42,000 issue of
debentures is to be preferred.
(iii) In case of deficit fund exceeding $42,000, issue of shares is preferred (considering the
fact that it is within the limit of authorized capital).

Solution        
Particulars Jan. Feb. Mar. Apr.
Receipts: $ $ $ $
Opening balance 8,000 15,000 – –
Sales 60,000 40,000 45,000 40,000
Issue of debentures – 30,000 41,000 –
Issue of shares – – – 55,000
Total 68,000 85,000 86,000 95,000
Less: Payments        
Purchases 48,000 80,000 81,000 90,000
Wages 5,000 5,000 5,000 5,000
Closing Cash 53,000 85,000 86,000 95,000
  15,000 – – –
Problem 2
Prepare Cash Budget of a Company for April, May and June 2019 in a columnar form using the
following information:
Month Sales Purchase Wage Exp.
Jan. (Actual) 80,000 45,000 20,000 5,000
Feb. 80,000 40,000 18,000 6,000
(Actual)
March 75,000 42,000 22,000 6,000
(Actual)
April Budget 90,000 50,000 24,000 6,000
May Budget 85,000 45,000 20,000 6,000
June Budget 80,000 35,000 18,000 5,000

You are further informed that:

(a) 10% of purchase and 20% of Sale are for cash
(b) The average collection period of the Co. is 1/2 month and credit purchase is paid off
regularly after one month
(c) Wages are paid half monthly and the rent of $500 excluded in expense is paid monthly
(d) Cash and Bank Balance on April 1, was $15,000 and the company wants to keep it on end of
every month below this figure, the excess cash being put in fixed deposits.
Solution

Cash Budget – 2019:

April ($) May ($) June ($)

Cash & Bank 15,000 11,700 12,700
Balance
Add:
Cash Sale (20%) 18,000 17,000 16,000
Cash collections 66,000 70,000 66,000
From Drs.
99,000 98,700 94,700
Less:
Cash Outflow
Cash flow (10%) 5,000 4,500 3,500
Payment of Crs. 37,800 45,000 40,500
Wages 23,000 22,000 19,000
Rent 500 500 500
Exp. 6,000 6,000 6,000
Fixed Deposits 15,000 8,000 13,000
 Cash balance 21,700 12,700 13,200
(closing)
99,000 98,700 94,700

Problem 3

From the following information prepare a monthly cash budget for the three months ending 31st
Dec.2019.

Month Sales Materials Wages Production Admin. Selling, etc

($) ($) ($) ($) ($)
June 3,000 1,800 650 225 160
July 3,250 2,000 750 225 160
Aug. 3,500 2,400 750 250 175
Sep. 3,750 2,250 750 300 175
Oct. 4,000 2,300 800 300 200
Nov. 4,250 2,500 900 350 200
Dec. 4,500 2,600 1,000 350 225

i) Credit terms are:
(a) Sales — 3 months to debtors. 10% of sales are on cash. On an average, 50% of credit
sales are paid on the due dates while the other 50% are paid in the month following
(b) Creditors for material — 2 months.

(ii) Lag in payment:

Wages. 1/4 month, overheads — 1/2 month.
(iii) Cash and Bank Balance on 1st Oct. expected $1,500.
(iv) Other information
(a) Plant and Machinery to be installed in Aug. at a cost of $24,000. It will be paid for by
monthly instalments of $5,00 each from 1st Oct.;
(b) Preference share dividend @ 5% on $50,000 are to be paid on 1st Dec.
(c) Calls on 250 equity shares @ $2 per share expected on 1st November;
(d) Dividends from investments amounting to $250 are expected on 31st Dec.;
(e) Income tax (advance) to be paid in December $ 500
Solution

Cash
Budget
Period: 3 months ending 31 Dec. 2019
Details: Ocr. ($) Nov. ($) Dec. ($)
Balance 1,500.00 537.5 350
b/d
Receipts (Estimated):
Sales 3,212.50 3,462.50 3,712.50
Capital – 500 –
Dividends – – 250
Total (A) 4,712.50 4,500 4,312.50
Payments:
Creditors 2,400.00 2,250.00 2,300.00
Wages 787.5 875 975
Overheads
:
Production 300 325 350
Adm. S. & 187.5 200 212.5
D.
Pref. – – 2,500.00
Dividend
Income tax – – 500
Plant and 5,00.00 5,00.00 5,00.00
Machinery
500 each
Total (B) 4,175.00 4,150.00 7,337.50
Year
Balance c/d 537.5 350 (-3,025)
(A – B)

Calculation of amount of sales:

Month Sale ($) Oct. ($) Nov. ($) December ($)
June 3,000 1,350.00 – –
July 3,250 1,462.50 1,462.50 –
Aug. 3,500 – 1,575.00 1,575.00
Sep. 3,750 – – 1,687.50
Oct. 4,000 400 – –
Nov. 4,250 – 4,250 –
Dec. 4,500 – – 450
Total – 3,212.50 3,462.50 3,712.50

Wages Calculation
1/4 wages of September and 3/4 wages of Oct. Thus,

(1/4 x 750) = 187.50

3/4 x 800 = 600
Total =
787.50

The wages of other months will be calculated on the same pattern.

Problem# 4 cash Budget For the period ending………..

Solved Example:
The directors of Kingston & Co. were concerned about the the company’s cash flow. They
requested their accountant to prepare a cash budget for the four months ending 30 April 2016.
(i) The following sales figures are for the months of November 2015 to June 2016. The figures
from January 2016 onward are estimated:

Half the sales are normally paid for in the month in which they occur and the customers are rewarded
with a 5% cash discount. The remaining sales are paid for net in the month following the sale.

(ii) Goods are sold at a mark-up of 25% on the goods purchased one month before sale. Half of the
purchases are paid for in the month of purchase and a 4% prompt settlement discount is received. The
remainder is paid in full in the following month.

(iii) Wages of $12000 per month are paid in the month in which they are earned. It is expected that the
wages will be increased by 10% from 1 March 2016.

(iv) Rent will cost $60000 per annum payable three monthly in advance in January, April, July and
December each year.

(v) The directors have arranged a bank loan of $60000 which would be credited to company’s  current
account in February 2016.

(vi) The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid on 15 January 2016.

(vii) The ordinary dividend of $12000 for the year 2015 will be paid in March 2016.

(viii) The bank balance at 31 December 2015 is $12000.

Required:
Prepare a cash budget for the four months ended 30 April 2016. Give your answers to the nearest dollar
($).

Solution:

Cash Budget

For the four months ending 30 April 2016 

Problem 5

A newly started company Quick Co. Ltd., wishes to prepare cash budget from January.

Prepare a cash budget for the first six months from the following estimated revenue and

expenditure:

Month Total Materials wages production selling and

1999 Sales overhead distribution

overheads

January 20,000 20000 4000 3200 800

February 22000 14000 4400 3300 900

 March 24000 14000 4600 3300 800

April 26000 12000 4600 3400 900

May 28000 12000 4800 3500 900

June 30000 16000 4800 3600 1000

Cash balance on 1st January 1999 was Rs. 10,000. A new machine is to be installed at Rs.

30,000 on credit, to be repaid by two equal instalments in March and April.

Sales commission @ 5% on total sales is to be paid within the month following actual sales. Rs.

10,000 being the amount of 2nd call may be received in March. Share premium amounting to

Rs.2, 000 is also obtainable with 2nd call.

Period of credit allowed by suppliers 2 months

Period of credit allowed to customers 1 month

ADVERTISEMENTS:

Delay in payment of overheads 1 month

Delay in payment of wages 1/2 month

Assume cash sales to be 50% of total sales.

Solution:

ADVERTISEMENTS:

Qiuick Co. Limited Cash Budget

Cash Budget
For the period January to June 1999

Details
Jan Feb March April May June
 A. balance 10000 18000 29800 20,000 6100 8800
b receipts            
cash sales 50% 10000 11000
12000 13000 14000 15,000
debtors - 10000
11000 12000 13000 14,000
capital -   10000      
share premium -   2000      
A+B total 20,000 39000 64800 45,000 33,100 37,800
C payments -          
material -   20000 14000 14,000 12000
wages 2000 4200 4500 4600 4700 4800
production OH - 3200 3300 3300 3,400 3500
selling and admin - 800 900 800 900 900
commission - 1000 1100 1200 1,300 1400
machinery     15000 15000    
C Total 2000 9200 44,800 38,900 24,300 22,600
Balance A+B+C 18000 29800 20000 6100 8800 15200

Sometimes, it is required to forecast cash or working capital and this can be computed in the

usual way as described above. Further consideration is necessary in respect of lag in payment

and lag in realisation.