Budgeting

Sample Case Study and Solution

Preparation of receipts from accounts receivable schedule and cash budget

Rainbow Enterprises has presented the following estimates relating to 2024 activities:
Quarter ending

31 Mar 30 Jun 30 Sep 31 Dec

Sales revenue $600 000 $700 000 $800 000 $850 000
Purchases 385 000 410 000 390 000 420 000
Cost of sales 300 000 350 000 400 000 425 000
Marketing and 150 000 150 000 150 000 150 000
administration expenses
Occupancy expenses 68 000 68 000 68 000 68 000
Depreciation expense 12 500 12 500 12 500 12500

Sales in the December quarter of 2023 were $500 000. All sales are on credit, of
which 70 per cent are collected in the quarter of sale and 30 per cent in the
following quarter. Purchases are on credit, and entity policy is such that all
purchases are paid for in the same quarter. The marketing and administration
expenses incurred and paid are the same. Occupancy expenses incurred and paid
are usually the same, except that the electricity bill (estimated to be $510) for
December 2024 will not be paid until January 2025. A major IT hardware
acquisition of $25 400, to be paid for in cash, is expected in the December
quarter. The bank balance at 31 December 2023 was $18 260.

Required

a. Prepare a schedule of receipts from accounts receivable showing cash

collections for each quarter of 2024.
b. Prepare a cash budget (on a quarterly basis) for the 12 months ending 31
December 2024.
c. Assess the cash position of the entity for 2024.
 a.
Receipts from Debtors Schedule for 12 months ending 31 December 2024

Mar Jun Sep Dec

December $500 150 000*
000
March $600 420 000# 180 000^
000
June $700 490 000 210 000
000
September $800 000 560 000 240 000
December $850 595 000
000
$570 000 $670 000 $770 000 $835 000

*$500 000 x 0.3

#600 000 x 0.7
^600 000 x 0.3

b.
Rainbow Enterprises
Cash budget
for 12 months ended 31 December 2024
Mar Jun Sep Dec
ANTICIPATED RECEIPTS
Receipts from debtors 570 000 670 000 770 000 835 000
(refer debtors schedule)
Total receipts 570 000 670 000 770 000 835 000
ANTICIPATED PAYMENTS
Payments to creditors 385 000 410 000 390 000 420 000
Marketing and Administration 150 000 150 000 150 000 150 000
Occupancy 68 000 68 000 68 000 67 490
IT equipment 25 400

Total Payments 603 000 628 000 608 000 662 890
Excess (Deficit) receipts over
payments (33 000) 42 000 162 000 172 110
Bank balance at beginning of month 18 260 (14 740) 27 260 189 260
Bank Balance at End of Month $(14 740) $27 260 $189 260 $361 370
*note cost of sales not included in the budget as this figure only shows the cost of
inventory sold to customers – involves no cashflow; also, depreciation excluded as
this is a non-cash transaction

c. The cash budget shows that in the first quarter the business will not have
sufficient cash to meet its requirements. It will be necessary for the business
to arrange any number of the following:
i. Arrange a bank overdraft
 ii. Arrange an injection of capital from the owners
iii. Delay payment to creditors
iv. Speed up payment from debtors
v. Reassess purchasing policy

However, the remaining quarters show sufficient cash to meet requirements.

Due to the higher cash surplus in the latter quarters the business will need to
consider investment strategies as the cash needs to be put to use to increase the
wealth of the business.