The next step in preparing a cash budget is to estimate the portion of budgeted costs and expenses that will require. cash payment in the near future.
Certain expenses will not require an outlay of cash. These include (1) expenses that result from the expiration of prepaid items (such as insurance policies) and (2) the depreciation of plan: assets..Thus only those costs and expenses financed by current passably (which include immediate cash payments as well as accounts payable and accrued expenses) will require cash payments.
Schedule B.2 separates the costs and expenses financed by NTl’s current playable from those related to the expiration of prepayments’ and depreciation. The’ column headed “Current Playable” indicates the portion of current costs and expenses that requires cash disbursements in the near future. Examples of these items include purchases of direct materials (whether for cash or on account), factory payrolls. and various overhead costs. The amounts shown under the columns headed “Expired Prepayments” and “Depreciation” are reported as expenses in the company’s budgeted income statement. However. these amounts do not call for future disbursements of cash. We may assume that the expired
prepayment estimates were made based on an evaluation of the company’s insurance policies.
Payments on Current Playable (Schedule B3) The purpose of the following schedule is La estimate the cash payments required each quarter for the costs and expenses classified as current playable in Schedule 81;
The starting point in Schedule B3 is the $50,000 beginning scabies balance appearing in NTI’s January 1,2000, balance sheet (page 939). To this amount, we add the total playable budgeted in Schedule B2. The balance of current playable at the end of the first quarter was estimated by Paul Toss, NTl’s treasurer, after making a thorough analysis of suppliers’ credit terms. Note the beginning balance of current playable for the second quarter is simply the ending balance from the first query.
Prepayments Budget (Schedule 84) This schedule budgets the expected cash payments for prepayments’ made during the period. For NTI, these payments involve its insurance policies. Thus preparation of the schedule called for an analysis of all policies reported on the’January I, 2000, balance sheet and their anticipated expiration of prepayments shown in Schedule B2. Based on this analysis, the following prepayments budget was prepared:
Spencer Grunt/Gammon Liaison
Debt Service Budget (Schedule B5) The purpose of this schedule is to summarize the cash payments (both principal and interest) required to service NI’ls debt each quarter, NTI has two notes payable outstanding on January I. 2000. The 12%. $36.000 note payable is the loan from Nancy Conrad. NT!,s president.
The loan agreement calls for quarterly payments of $9,000 plus interest accrued on the outstanding balance at a quarterly rate of 3%. Thus the debt service on this note in the first quarter equals $9,000 in principal plus interest of $I.OXO ($36.000 X 3m). or a cash outlay of $JOJJ80. The ‘note’s debt service in the second quarter equals $l).OOOin principal plus interest of $810 ($27.000 X 3%), or a cash outlay of $<),810. The 14%.$246.000 note payable is to NTI’s hank. The loan agreement calls for payment of the entire $246.000 at the end of the first quarter of ·:WOO.plus interest accrued at a quarterly rate of 3.5%;Thus the debt service on this note in the first quarter equals $246.0()O plus-interest of $8.61 0 ($246.000 X 3.Y~, );01′ a cash out lay of $2.5-1J) 10. There is no debt service cost associated with this uotc in the second quarter. As shown below,’ the total debt service budget is $26.J.6c)(} in the first quarter and $9.810 in the second quarter.
Budgeted Income taxes (Schedule B6) The budgeted cash payments for income tax expense are summarized on the following pagc.: Each quarter. NTI makes income tax payments equal to its income tax liability at the beginning of that quarter: NTl’s $64.00()
liability at the beginning of the first quarter was taken from its January I. 2000. balance sheet. The $46,124 liability at ihe beginning of the second quarter is simply the income tax liability at the end of the first quarter.
Estimated Cash Preempts from Customers (Schedule 87). All of NTI’s sales are rnade 01; account. As such; the sole source of cash. receipts is the collection of accounts republic As shown in the table on page 9~2, NFl turned over its accounts receivable 4.5 times during 1999. Thus the-average account was outstanding for 81. days (3115 days + 4.5 = 81). In- an attempt to improve cash t1()W performance in 2000, ‘NTI’s credit manager. Richard Baker. set the following goals for his department: (1) to. collect the. entire
$225,000 of accounts receivable reported on the January I, 2000, balance sheet by the end of the first quarter, and (‘2) to collect 75’:0 of quarterly sales during the quarter in . which they arc made, and collect the remaining 25% in the subsequent quarter. If successful,
Baker estimates that N1Ts average collection period will be reduced from 81 days to 30 days.The following schedule shows the budgeted cash collections under the new collection policy. Losses for conductible accounts are ignored in our example.