Question: The company would like to prepare a cash budget for the months of April, May, and June. The relevant details are given below (figures given are in $000):
Sales Purchases Operating Expenses
January 5,000 3,000 1,600
February 8,000 6,000 1,600
March 10,000 8,000 1,600
April 12,000 10,000 1,600
May 10,000 8,000 1,600
June 15,000 12,000 1,600
20% of sales every month is for cash. 80% of credit sales are collected in the month following sales and the rest during the second month after sales.
40% of purchase are for cash and credit purchases are paid in the following month.
Operating expenses are paid in the month in which it is incurred.
HMM will pay a dividend of $10,000,000 in the month of June.
Cash balance as of April 1 is $6,000,000
(a) Prepare a cash budget for the months April, May, and June.
(b) Discuss the use of cash budgets.