Cash Management

Chapter 12
Cash Management

1 ICAI Mat; MTP Aug 19

PREPARE monthly cash budget for six months beginning from April 2017 on the basis of the
following information:-
(i) Estimated monthly sales are as follows:-
` `
January 1,00,000 June 80,000
February 1,20,000 July 1,00,000
March 1,40,000 August 80,000
April 80,000 September 60,000
May 60,000 October 1,00,000
(ii) Wages and salaries are estimated to be payable as follows:-
T E
U
TIT
` `

INS
April 9,000 July 10,000
May 8,000 August 9,000
June
S J C 10,000 September 9,000

(iii) Of the sales, 80% is on credit and 20% for cash. 75% of the credit sales are collected within
one month and the balance in two months. There are no bad debt losses.
(iv) Purchases amount to 80% of sales and are made on credit and paid for in the month
preceding the sales.
(v) The firm has 10% debentures of ` 1,20,000. Interest on these has to be paid quarterly in
January, April and so on.
(vi) The firm is to make an advance payment of tax of ` 5,000 in July, 2017.
(vii) The firm had a cash balance of ` 20,000 on April 1, 2017, which is the minimum desired level
of cash balance. Any cash surplus/deficit above/below this level is made up by temporary
investments/liquidation of temporary investments or temporary borrowings at the end of
each month (interest on these to be ignored).

Cash Budget

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Answer
Workings:
Collection from debtors:
(Amount in `)
February March April May June July August September
Total sales 1,20,000 1,40,000 80,000 60,000 80,000 1,00,000 80,000 60,000
Credit sales 96,000 1,12,000 64,000 48,000 64,000 80,000 64,000 48,000
(80% of total
sales)
Collections:
One month 72,000 84,000 48,000 36,000 48,000 60,000 48,000
Two months 24,000 28,000 16,000 12,000 16,000 20,000
Total collections 1,08,000 76,000 52,000 60,000 76,000 68,000

Monthly Cash Budget for Six months, April to September, 2017

(Amount in `)
Receipts: April May June
TE
July August September

ITU
Opening balance 20,000 20,000 20,000 20,000 20,000 20,000
Cash sales 16,000
S T
12,000 16,000 20,000 16,000 12,000
Collection from
debtors
1,08,000

C IN
76,000 52,000 60,000 76,000 68,000

Total cash available (A)

Payments:
S J1,44,000 1,08,000 88,000 1,00,000 1,12,000 1,00,000

Purchases 48,000 64,000 80,000 64,000 48,000 80,000

Wages & salaries 9,000 8,000 10,000 10,000 9,000 9,000
Interest on debentures 3,000 --- ---- 3,000 --- ----
Tax payment --- --- ---- 5,000 ---- ----
Total payments (B) 60,000 72,000 90,000 82,000 57,000 89,000
Minimum cash balance 20,000 20,000 20,000 20,000 20,000 20,000
desired
Total cash needed (C) 80,000 92,000 1,10,000 1,02,000 77,000 1,09,000
Surplus - deficit (A-C) 64,000 16,000 (22,000) (2,000) 35,000 (9,000)
Investment/financing (64,000) (16,000) ---- (35,000) -----
Temporary Investments
Liquidation of ---- ---- 22,000 2,000 ---- 9,000
temporary investments
or temporary
borrowings

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Total effect of (64,000) (16,000) 22,000 2,000 (35,000) 9,000

investment/financing
(D)
Closing cash balance 20,000 20,000 20,000 20,000 20,000 20,000
(A+D-B)

2 ICAI Mat
From the following information relating to a departmental store, you are required to PREPARE
for the three months ending 31st March, 2019:-
(a) Month-wise cash budget on receipts and payments basis; and
(b) Statement of Sources and uses of funds for the three months period.
It is anticipated that the working capital at 1st January, 2019 will be as follows:-
` in ‘000’s
Cash in hand and at bank 545
Short term investments 300
Debtors
T E 2,570
Stock
I T U 1,300
Trade creditors
S T 2,110
Other creditors
C I N 200

SJ
Dividends payable 485
Tax due 320
Plant 800
Budgeted Profit Statement: ` in ‘000’s
January February March
Sales 2,100 1,800 1,700
Cost of sales 1,635 1,405 1,330
Gross Profit 465 395 370
Administrative, Selling and Distribution Expenses 315 270 255
Net Profit before tax 150 125 115

Budgeted balances at the end of each months: ` in ‘000’s

31st Jan 28th Feb. 31st March
Short term investments 700 --- 200
Debtors 2,600 2,500 2,350
Stock 1,200 1,100 1,000
Trade creditors 2,000 1,950 1,900
Other creditors 200 200 200

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Dividends payable 485 -- --

Tax due 320 320 320
Plant (depreciation ignored) 800 1,600 1,550

Depreciation amount to ` 60,000 is included in the budgeted expenditure for each month.

Cash Budget & Statement of Sources and

Uses of Funds

Answer
Workings:
` in ‘000’
Jan. 2019 Feb. 2019 March 2019
(1) Payments to creditors:

TE
Cost of Sales 1,635 1,405 1,330
Add Closing Stocks
I T U 1,200 1,100 1,000

ST
2,835 2,505 2,330
Less: Opening Stocks
Purchases
C I N 1,300
1,535
1,200
1,305
1,100
1,230

SJ
Add: Trade Creditors, Opening balance 2,110
3,645
2,000
3,305
1,950
3,180
Less: Trade Creditors, closing balance 2,000 1,950 1,900
Payment 1,645 1,355 1,280
(2) Receipts from debtors:
Debtors, Opening balances 2,570 2,600 2,500
Add: Sales 2,100 1,800 1,700
4,670 4,400 4,200
Less: Debtors, closing balance 2,600 2,500 2,350
Receipt 2,070 1,900 1,850
CASH BUDGET
(a) 3 months ending 31st March, 2019
(`, in 000’s)
Jan. 2019 Feb. 2019 March,2019
Opening cash balances 545 315 65
Add: Receipts:

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From Debtors 2,070 1,900 1,850

Sale of Investments --- 700 ----
Sale of Plant --- --- 50
Total (A) 2,615 2,915 1,965
Deduct: Payments
Creditors 1,645 1,355 1,280
Expenses 255 210 195
Capital Expenditure --- 800 ---
Payment of dividend --- 485 ---
Purchase of investments 400 --- 200
Total payments (B) 2,300 2,850 1,675
Closing cash balance (A-B) 315 65 290

(b) Statement of Sources and uses of Funds for the Three Month Period Ending 31st
March, 2019
Sources: ` ’000 ` ’000
Funds from operation:
Net profit (150+125+115)
T E 390
U
TIT
Add: Depreciation (60×3) 180 570
Sale of plant

I N S 50
620

SJ
Decrease in Working Capital C
(Refer Statement of changes in working capital)
665

Total 1,285
Uses:
Purchase of plant 800
Payment by dividends 485
Total 1,285

Statement of Changes in Working Capital

January,19 March, 19 Increase Decrease
` 000 ` 000 ` 000 ` 000
Current Assets
Cash in hand and at Bank 545 290 255
Short term Investments 300 200 100
Debtors 2,570 2,350 220
Stock 1,300 1,000 300
4,715 3,840

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Current Liabilities
Trade Creditors 2,110 1,900 210 ---
Other Creditors 200 200 --- ---
Tax Due 320 320 --- ---
2,630 2,420
Working Capital 2,085 1,420
Decrease 665 665
2,085 2,085 875 875

3 ICAI Mat
You are given below the Profit & Loss Accounts for two years for a company:
Profit and Loss Account
Year 1 Year 2 Year 1 Year 2
` ` ` `
To Opening stock 80,00,000 1,00,00,000 By Sales 8,00,00,000 10,00,00,000
To Raw materials 3,00,00,000
T E
4,00,00,000 By Closing stock 1,00,00,000 1,50,00,000
To Stores 1,00,00,000
I T U
1,20,00,000 By Misc. Income 10,00,000 10,00,000
To Manufacturing 1,00,00,000
S
1,60,00,000T
Expenses
To Other Expenses
C I N
1,00,00,000 1,00,00,000
To Depreciation
To Net Profit
SJ
1,00,00,000 1,00,00,000
1,30,00,000 1,80,00,000 - -
9,10,00,000 11,60,00,000 9,10,00,000 11,60,00,000

Sales are expected to be ` 12,00,00,000 in year 3.

As a result, other expenses will increase by ` 50,00,000 besides other charges. Only raw materials
are in stock. Assume sales and purchases are in cash terms and the closing stock is expected to
go up by the same amount as between year 1 and 2. You may assume that no dividend is being
paid. The Company can use 75% of the cash generated to service a loan.
COMPUTE how much cash from operations will be available in year 3 for the purpose? Ignore
income tax.

Cash Budget for long period

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Answer
Projected Profit and Loss Account for the year 3
Year 2 Year 3 Year 2 Year 3
Actual Projected Actual Projected
(` in lakhs) (` in lakhs) (` in lakhs) (` in lakhs)
To Materials consumed 350 420 By Sales 1,000 1,200
To Stores 120 144 By Misc. Income 10 10
To Mfg. Expenses 160 192
To Other expenses 100 150
To Depreciation 100 100
To Net profit 180 204
1,010 1,210 1,010 1,210

Cash Flow:
(` in lakhs)
Profit 204
Add: Depreciation 100
T E 304
Less: Cash required for increase in stock
I T U 50
Net cash inflow
S T 254

C I N
Available for servicing the loan: 75% of ` 2,54,00,000 or ` 1,90,50,000
Working Notes:
(i)
SJ
Material consumed in year 2: 35% of sales.
35
Likely consumption in year 3: ` 1,200 × or ` 420 (lakhs)
100
(ii) Stores are 12% of sales, as in year 2.
(iii) Manufacturing expenses are 16% of sales.
Note: The above also shows how a projected profit and loss account is prepared.

4 ICAI Mat
Prachi Ltd is a manufacturing company producing and selling a range of cleaning products to
wholesale customers. It has three suppliers and two customers. Prachi Ltd relies on its cleared
funds forecast to manage its cash.
You are an accounting technician for the company and have been asked to prepare a cleared
funds forecast for the period Monday 7 August to Friday 11 August 2019 inclusive. You have
been provided with the following information:

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(1) Receipts from customers

Credit terms Payment method 7 Aug 2019 sales 7 Jul 2019 sales
W Ltd 1 calendar month BACS ` 150,000 ` 130,000
X Ltd None Cheque ` 180,000 ` 160,000

(a) Receipt of money by BACS (Bankers’ Automated Clearing Services) is instantaneous.

(b) X Ltd’s cheque will be paid into Prachi Ltd’s bank account on the same day as the sale
is made and will clear on the third day following this (excluding day of payment).
(2) Payments to suppliers
7 Aug 2019 7 Jul 2019 7 Jun 2019
Supplier name Credit terms Payment method
purchases purchases purchases
A Ltd 1 calendar Standing order ` 65,000 ` 55,000 ` 45,000
month
B Ltd 2 calendar Cheque ` 85,000 ` 80,000 ` 75,000
months
C Ltd None Cheque ` 95,000 ` 90,000 ` 85,000

E
(a) Prachi Ltd has set up a standing order for ` 45,000 a month to pay for supplies from A
T
I T U
Ltd. This will leave Prachi’s bank account on 7 August.
Every few months, an adjustment is made to reflect the actual cost of supplies
S T
purchased (you do NOT need to make this adjustment).
I N
(b) Prachi Ltd will send out, by post, cheques to B Ltd and C Ltd on 7 August. The amounts
C
SJ
will leave its bank account on the second day following this (excluding the day of
posting).
(3) Wages and salaries
July 2019 August 2019
Weekly wages ` 12,000 ` 13,000
Monthly salaries ` 56,000 ` 59,000
(a) Factory workers are paid cash wages (weekly). They will be paid one week’s wages, on
11 August, for the last week’s work done in July (i.e. they work a week in hand).
(b) All the office workers are paid salaries (monthly) by BACS. Salaries for July will be paid
on 7 August.
(4) Other miscellaneous payments
(a) Every Monday morning, the petty cashier withdraws ` 200 from the company bank
account for the petty cash. The money leaves Prachi’s bank account straight away.
(b) The room cleaner is paid ` 30 from petty cash every Wednesday morning.
(c) Office stationery will be ordered by telephone on Tuesday 8 August to the value of
` 300. This is paid for by company debit card. Such payments are generally seen to
leave the company account on the next working day.

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(d) Five new softwares will be ordered over the Internet on 10 August at a total cost of `
6,500. A cheque will be sent out on the same day. The amount will leave Prachi Ltd’s
bank account on the second day following this (excluding the day of posting).
(5) Other information
The balance on Prachi’s bank account will be ` 200,000 on 7 August 2019. This represents
both the book balance and the cleared funds.
PREPARE a cleared funds forecast for the period Monday 7 August to Friday 7 August 2019
inclusive using the information provided. Show clearly the uncleared funds float each day.

Fund forecast

Answer
Cleared Funds Forecast

TE
7 Aug 19 8 Aug 19 9 Aug 19 10 Aug 19 11 Aug 19

ITU
(Monday) (Tuesday) (Wednesday) (Thursday) (Friday)

Receipts
`

S
`
T ` ` `

W Ltd
C
1,30,000 IN 0 0 0 0
X Ltd
(a) S J
1,30,000
0 0
0
0
0
1,80,000
1,80,000
0
0
Payments
A Ltd 45,000 0 0 0 0
B Ltd 0 0 75,000 0 0
C Ltd 0 0 95,000 0 0
Wages 0 0 0 0 12,000
Salaries 56,000 0 0 0 0
Petty Cash 200 0 0 0 0
Stationery 0 0 300 0 0
(b) 1,01,200 0 1,70,300 0 12,000
Cleared excess Receipts
over payments (a) – (b) 28,800 0 (1,70,300) 1,80,000 (12,000)
Cleared balance b/f 2,00,000 2,28,800 2,28,800 58,500 2,38,500
Cleared balance c/f (c) 2,28,800 2,28,800 58,500 2,38,500 2,26,500
Uncleared funds float
Receipts 1,80,000 1,80,000 1,80,000 0 0

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Payments (1,70,000) (1,70,300) 0 (6,500) (6,500)

(d) 10,000 9,700 180,000 (6,500) (6,500)
Total book balance c/f 2,38,800 2,38,500 2,38,500 2,32,000 2,20,000
(c) + (d)

5 ICAI Mat; MTP Aug 19

A firm maintains a separate account for cash disbursement. Total disbursement are ` 1,05,000
per month or ` 12,60,000 per year. Administrative and transaction cost of transferring cash to
disbursement account is ` 20 per transfer. Marketable securities yield is 8% per annum.

DETERMINE the optimum cash balance according to William J. Baumol model.

William J Baumol Model

T E
Answer
I T U
S T
2 " ` 12, 60 , 000 " ` 20
The optimum cash balance C !

C I N
0.08
= ` 25,100

SJ
Cash

Average Cash

0
Time

The limitation of the Baumol’s model is that it does not allow the cash flows to fluctuate. Firms in
practice do not use their cash balance uniformly nor are they able to predict daily cash inflows
and outflows. The Miller-Orr (MO) model overcomes this shortcoming and allows for daily cash
flow variation.

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6 ICAI Mat
The following information is available in respect of Sai trading company:
(i) On an average, debtors are collected after 45 days; inventories have an average holding
period of 75 days and creditor’s payment period on an average is 30 days.
(ii) The firm spends a total of ` 120 lakhs annually at a constant rate.
(iii) It can earn 10 per cent on investments.
From the above information, you are required to CALCULATE:
(a) The cash cycle and cash turnover,
(b) Minimum amounts of cash to be maintained to meet payments as they become due,
(c) Savings by reducing the average inventory holding period by 30 days.

Cash cycle, Cash Turnover and minimum

amount of cash to meet payment.

T E
Answer I T U
S T
C I N
(a) Cash cycle = 45 days + 75 days – 30 days = 90 days (3 months)
Cash turnover = 12 months (360 days)/3 months (90 days) = 4.
SJ
(b) Minimum operating cash = Total operating annual outlay/cash turnover, that is, ` 120
lakhs/4 = ` 30 lakhs.
(c) Cash cycle = 45 days + 45 days – 30 days = 60 days (2 months).
Cash turnover = 12 months (360 days)/2 months (60 days) = 6.
Minimum operating cash = ` 120 lakhs/6 = ` 20 lakhs.
Reduction in investments = ` 30 lakhs – ` 20 lakhs = ` 10 lakhs.
Savings = 0.10 × ` 10 lakhs = ` 1 lakh.

7 Nov 19
Slide Ltd. is preparing a cash flow forecast for the three months period from January to the end
of March. The following sales volumes have been forecasted:
Months December January February March April
Sales (units) 1,800 1,875 1,950 2,100 2,250

Selling price per unit is ` 600. Sales are all on one month credit. Production of goods for sale takes
place one month before sales. Each unit produced requires two units of raw materials costing

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` 150 per unit. No raw material inventory is held. Raw materials purchases are on one month
credit. Variable overheads and wages equal to ` 100 per unit are incurred during production
and paid in the month of production. The opening cash balance on 1st January is expected to
be ` 35,000. A long term loan of ` 2,00,000 is expected to be received in the month of March. A
machine costing ` 3,00,000 will be purchased in March.
(a) PREPARE a cash budget for the months of January, February and March and calculate the
cash balance at the end of each month in the three months period.
(b) CALCULATE the forecast current ratio at the end of the three months period. (10 Marks)

Cash Budget & Forecast Current Ratio

Answer
Working Notes:
(1) Calculation of Collection from Trade Receivables:
T E
Particulars December
I T U
January February March
Sales (units)
S T
1,800 1,875 1,950 2,100
Sales (@ ` 600 per unit) / Trade
Receivables (Debtors) (`)
C I N 10,80,000 11,25,000 11,70,000 12,60,000

Collection from Trade

SJ
Receivables (Debtors) (`)
10,80,000 11,25,000 11,70,000

(2) Calculation of Payment to Trade Payables:

Particulars December January February March
Output (units) 1,875 1,950 2,100 2,250
Raw Material (2 units per output) 3,750 3,900 4,200 4,500
(units)
Raw Material (@ ` 150 per unit) / 5,62,500 5,85,000 6,30,000 6,75,000
Trade Payables (Creditors) (`)
Payment to Trade Payables 5,62,500 5,85,000 6,30,000
(Creditors) (`)

(3) Calculation of Variable Overheads and Wages:

Particulars January February March
Output (units) 1,950 2,100 2,250
Payment in the same month @ ` 1,95,000 2,10,000 2,25,000
100 per unit (`)

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(a) Preparation of Cash Budget

Particulars January (`) February (`) March (`)
Opening Balance 35,000 3,57,500 6,87,500
Receipts:
Collection from Trade Receivables (Debtors) 10,80,000 11,25,000 11,70,000
Receipt of Long-Term Loan 2,00,000
Total (A) 11,15,000 14,82,500 20,57,500
Payments:
Trade Payables (Creditors) for Materials 5,62,500 5,85,000 6,30,000
Variable Overheads and Wages 1,95,000 2,10,000 2,25,000
Purchase of Machinery 3,00,000
Total (B) 7,57,500 7,95,000 11,55,000
Closing Balance (A – B) 3,57,500 6,87,500 9,02,500

(b) Calculation of Current Ratio

Particulars March (`)
Output Inventory (i.e. units produced in March) 9,00,000
T E
[(2,250 units x 2 units of raw material per unit of output x ` 150 per unit

I T U
of raw material) + 2,250 units x ` 100 for variable overheads and wages]

S T
or, [6,75,000 + 2,25,000] from Working Notes 2 and 3
Trade Receivables (Debtors)
C I N 12,60,000
Cash Balance
Current Assets SJ 9,02,500
30,62,500
Trade Payables (Creditors) 6,75,000
Current Liabilities 6,75,000
Current Ratio (Current Assets / Current Liabilities) 4.537 approx.

8 MTP May 21
PREPARE monthly cash budget for the first six months of 2021 on the basis of the following
information:
(i) Actual and estimated monthly sales are as follows:
Actual (`) Estimated (`)
October 2020 2,00,000 January 2021 60,000
November 2020 2,20,000 February 2021 80,000
December 2020 2,40,000 March 2021 1,00,000
April 2021 1,20,000

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May 2021 80,000

June 2021 60,000
July 2021 1,20,000
(ii) Operating Expenses (including salary & wages) are estimated to be payable as follows:
Month (`) Month (`)
January 2021 22,000 April 2021 30,000
February 2021 25,000 May 2021 25,000
March 2021 30,000 June 2021 24,000
(iii) Of the sales, 75% is on credit and 25% for cash. 60% of the credit sales are collected after
one month, 30% after two months and 10% after three months.
(iv) Purchases amount to 80% of sales and are made on credit and paid for in the month
preceding the sales.
(v) The firm has 12% debentures of `1,00,000. Interest on these has to be paid quarterly in
January, April and so on.
(vi) The firm is to make an advance payment of tax of ` 5,000 in April.

T E
(vii) The firm had a cash balance of ` 40,000 at 31st Dec. 2020, which is the minimum desired
level of cash balance. Any cash surplus/deficit above/below this level is made up by

I T U
temporary investments/liquidation of temporary investments or temporary borrowings at

S T
the end of each month (interest on these to be ignored). (10 Marks)

C I N
Cash Budget
SJ

Answer
Monthly Cash Budget for first six months of 2021
(Amount in `)
Particulars Jan. Feb. Mar. April May June
Opening balance 40,000 40,000 40,000 40,000 40,000 40,000
Receipts:
Cash sales 15,000 20,000 25,000 30,000 20,000 15,000
Collection from debtors 1,72,500 97,500 67,500 67,500 82,500 70,500
Total cash available (A) 2,27,500 1,57,500 1,32,500 1,37,500 1,42,500 1,25,500
Payments:
Purchases 64,000 80,000 96,000 64,000 48,000 96,000

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Operating Expenses 22,000 25,000 30,000 30,000 25,000 24,000

Interest on debentures 3,000 - - 3,000 - -
Tax payment - - - 5,000 - -
Total payments (B) 89,000 1,05,000 1,26,000 1,02,000 73,000 1,20,000
Minimum cash balance 40,000 40,000 40,000 40,000 40,000 40,000
desired
Total cash needed (C) 1,29,000 1,45,000 1,66,000 1,42,000 1,13,000 1,60,000
Surplus/(deficit) (A - C) 98,500 12,500 (33,500) (4,500) 29,500 (34,500)
Investment/financing (98,500) (12,500) - - (29,500) -
Temporary Investments
Liquidation of temporary 33,500 4,500 - 34,500
investments or temporary
borrowings
Total effect of investment/ (98,500) (12,500) 33,500 4,500 (29,500) 34,500
financing(D)
Closing cash balance 40,000 40,000 40,000 40,000 40,000 40,000
(A + D - B)
Workings:
T E
1. Collection from debtors:
I T U
S T (Amount in `)

I N
Year 2020
C
Year 2021

SJ
Oct. Nov. Dec. Jan. Feb. Mar. April May June
Total sales 2,00,000 2,20,000 2,40,000 60,000 80,000 1,00,000 1,20,000 80,000 60,000
Credit sales 1,50,000 1,65,000 1,80,000 45,000 60,000 75,000 90,000 60,000 45,000
(75% of total sales)
Collections:
One month 90,000 99,000 1,08,000 27,000 36,000 45,000 54,000 36,000
Two months 45,000 49,500 54,000 13,500 18,000 22,500 27,000
Three months 15,000 16,500 18,000 4,500 6,000 7,500
Total collections 1,72,500 97,500 67,500 67,500 82,500 70,500

2. Payment to Creditors:
(Amount in `)
Year 2021
Jan Feb Mar Apr May Jun Jul
Total sales 60,000 80,000 1,00,000 1,20,000 80,000 60,000 1,20,000
Purchases 48,000 64,000 80,000 96,000 64,000 48,000 96,000
(80% of total sales)
Payment:
One month prior 64,000 80,000 96,000 64,000 48,000 96,000

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 Cash Management

9 ICAI Mat
The following information relates to Zeta Limited, a publishing company:
The selling price of a book is ₹ 15, and sales are made on credit through a book club and invoiced
on the last day of the month.
Variable costs of production per book are materials (₹ 5), labour (₹ 4), and overhead (₹ 2)
The sales manager has forecasted the following volumes:
Month No. of Books
November 1,000
December 1,000
January 1,000
February 1,250
March 1,500
April 2,000
May 1,900
June 2,200
July 2,200
T E
August 2,300
I T U
Customers are expected to pay as follows:
S T
One month after the sale
C I N
40%
Two months after the sale
SJ 60%
The company produces the books two months before they are sold and the creditors for
materials are paid two months after production.
Variable overheads are paid in the month following production and are expected to increase
by 25% in April; 75% of wages are paid in the month of production and 25% in the following
month. A wage increase of 12.5% will take place on 1st March.
The company is going through a restructuring and will sell one of its freehold properties in May
for ₹ 25,000, but it is also planning to buy a new printing press in May for ₹ 10,000. Depreciation
is currently ₹ 1,000 per month, and will rise to ₹ 1,500 after the purchase of the new machine.
The company’s corporation tax (of ₹ 10,000) is due for payment in March. The company presently
has a cash balance at bank on 31 December 2019, of ₹ 1,500.
You are required to PREPARE a cash budget for the six months from January to June, 2020.

Cash Budget

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Contact: 033-4059-3800 Website: sjc.co.in
 Cash Management

Answer
Workings:
1. Sale receipts
Month Nov Dec Jan Feb Mar Apr May Jun
Forecast sales (S) 1,000 1,000 1,000 1,250 1,500 2,000 1,900 2,200
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
S × 15 15,000 15,000 15,000 18,750 22,500 30,000 28,500 33,000
Debtors pay:
1 month 40% 6,000 6,000 6,000 7,500 9,000 12,000 11,400
2 month 60% - 9,000 9,000 9,000 11,250 13,500 18,000
- - 15,000 15,000 16,500 20,250 25,500 29,400
2. Payment for materials – books produced two months before sale
Month Nov Dec Jan Feb Mar Apr May Jun
Qty produced (Q) 1,000 1,250 1,500 2,000 1,900 2,200 2,200 2,300
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
Materials (Q × 5) 5,000 6,250 7,500 10,000 9,500 11,000 11,000 11,500
Paid (2 months - - 5,000 6,250 T E
7,500 10,000 9,500 11,000
after)
I T U
3. Variable overheads
S T
Month Nov
C I
DecN Jan Feb Mar Apr May Jun
Qty produced (Q)
SJ
1,000
₹
1,250
₹
1,500
₹
2,000
₹
1,900
₹
2,200
₹
2,200
₹
2,300
₹
Var. overhead 2,000 2,500 3,000 4,000 3,800
(Q × 2)
Var. overhead 5,500 5,500 5,750
(Q × 2.50)
Paid one month 2,000 2,500 3,000 4,000 3,800 5,500 5,500
later
4. Wages payments
Month Dec Jan Feb Mar Apr May Jun
Qty produced (Q) 1,250 1,500 2,000 1,900 2,200 2,200 2,300
₹ ₹ ₹ ₹ ₹ ₹ ₹
Wages (Q × 4) 5,000 6,000 8,000
Wages (Q × 4.50) 8,550 9,900 9,900 10,350
75% this month 3,750 4,500 6,000 6,412 7,425 7,425 7,762
25% this month 1,250 1,500 2,000 2,137 2,475 2,475
5,750 7,500 8,412 9,562 9,900 10,237

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 Cash Management

Cash budget – six months ended June

Jan Feb Mar Apr May Jun
₹ ₹ ₹ ₹ ₹ ₹
Receipts:
Sales receipts 15,000 15,000 16,500 20,250 25,500 29,400
Freehold property - - - - 25,000 -
15,000 15,000 16,500 20,250 50,500 29,400
Payments:
Materials 5,000 6,250 7,500 10,000 9,500 11,000
Var. overheads 2,500 3,000 4,000 3,800 5,500 5,500
Wages 5,750 7,500 8,412 9,562 9,900 10,237
Printing press - - - - 10,000 -
Corporation tax - - 10,000 - - -
13,250 16,750 29,912 23,362 34,900 26,737
Net cash flow 1,750 (1,750) (13,412) (3,112) 15,600 2,663
Balance b/f 1,500 3,250 1,500 (11,912) (15,024) 576
Cumulative cash flow 3,250 1,500 (11,912)
E
(15,024)
T
576 3,239

I T U
10 S T ICAI Mat

C I N
From the information and the assumption that the cash balance in hand on 1st January 2020 is

SJ
₹ 72,500, PREPARE a cash budget.
Assume that 50 per cent of total sales are cash sales. Assets are to be acquired in the months
of February and April. Therefore, provisions should be made for the payment of ₹ 8,000 and
₹ 25,000 for the same. An application has been made to the bank for the grant of a loan of
₹ 30,000 and it is hoped that the loan amount will be received in the month of May.
It is anticipated that a dividend of ₹ 35,000 will be paid in June. Debtors are allowed one
month’s credit. Creditors for materials purchased and overheads grant one month’s credit. Sales
commission at 3 per cent on sales is paid to the salesman each month.
Sales Materials Salaries & Production Office and Selling
Month Purchases Wages Overheads Overheads
(₹) (₹) (₹) (₹) (₹)
January 72,000 25,000 10,000 6,000 5,500
February 97,000 31,000 12,100 6,300 6,700
March 86,000 25,500 10,600 6,000 7,500
April 88,600 30,600 25,000 6,500 8,900
May 1,02,500 37,000 22,000 8,000 11,000
June 1,08,700 38,800 23,000 8,200 11,500

12.18 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Cash Management

Cash Budget

Answer
Cash Budget
Jan Feb Mar Apr May June Total
₹ ₹ ₹ ₹ ₹ ₹ ₹
Receipts
Cash sales 36,000 48,500 43,000 44,300 51,250 54,350 2,77,400
Collections from - 36,000 48,500 43,000 44,300 51,250 2,23,050
debtors
Bank loan - - - - 30,000 - 30,000
Total 36,000 84,500 91,500 87,300 1,25,550 1,05,600 5,30,450
Payments
Materials - 25,000 31,000 25,500T E 30,600 37,000 1,49,100
Salaries and wages 10,000 12,100
I
10,600 T U
25,000 22,000 23,000 1,02,700
Production overheads - 6,000
S T
6,300 6,000 6,500 8,000 32,800
Office & selling -
C I N
5,500 6,700 7,500 8,900 11,000 39,600

SJ
overheads
Sales commission 2,160 2,910 2,580 2,658 3,075 3,261 16,644
Capital expenditure - 8,000 - 25,000 - - 33,000
Dividend - - - - - 35,000 35,000
Total 12,160 59,510 57,180 91,658 71,075 1,17,261 4,08,844
Net cash flow 23,840 24,990 34,320 (4,358) 54,475 (11,661) 1,21,606
Balance, beginning of 72,500 96,340 1,21,330 1,55,650 1,51,292 2,05,767 1,94,106
month
Balance, end of month 96,340 1,21,330 1,55,650 1,51,292 2,05,767 1,94,106 3,15,712

11 ICAI Mat
Consider the balance sheet of Maya Limited as on 31 December,2019. The company has received
a large order and anticipates the need to go to its bank to increase its borrowings. As a result,
it has to forecast its cash requirements for January, February and March, 2020. Typically, the
company collects 20 per cent of its sales in the month of sale, 70 per cent in the subsequent
month, and 10 per cent in the second month after the sale. All sales are credit sales.

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 Cash Management

Amount Amount
Equity & liabilities Assets
(₹ in ‘000) (₹ in ‘000)
Equity shares capital 100 Net fixed assets 1,836
Retained earnings 1,439 Inventories 545
Long-term borrowings 450 Accounts receivables 530
Accounts payables 360 Cash and bank 50
Loan from banks 400
Other liabilities 212
2,961 2,961
Purchases of raw materials are made in the month prior to the sale and amounts to 60 per
cent of sales. Payments for these purchases occur in the month after the purchase. Labour
costs, including overtime, are expected to be ₹ 1,50,000 in January, ₹ 2,00,000 in February, and
₹ 1,60,000 in March. Selling, administrative, taxes, and other cash expenses are expected to be
₹ 1,00,000 per month for January through March. Actual sales in November and December and
projected sales for January through April are as follows (in thousands):
Month ₹ Month ₹ Month ₹
November 500 January 600 March 650
December 600 February 1,000
T E April 750
On the basis of this information:
I T U
Required:
S T
I N
(a) PREPARE a cash budget for the months of January, February, and March.
C
SJ
(b) DETERMINE the amount of additional bank borrowings necessary to maintain a cash
balance of ₹ 50,000 at all times.
(c) PREPARE a proforma balance sheet for March 31.

Cash Budget and Proforma Balance Sheet

Answer
(a) Cash Budget (in thousands)
Nov. Dec. Jan. Feb. Mar. Apr.
₹ ₹ ₹ ₹ ₹ ₹
Sales 500 600 600 1,000 650 750
Collections, current month’s sales 120 200 130
Collections, previous month’s sales 420 420 700

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 Cash Management

Collections, previous 2 month’s sales 50 60 60

Total cash receipts 590 680 890
Purchases 360 600 390 450
Payment for purchases 360 600 390
Labour costs 150 200 160
Other expenses 100 100 100
Total cash disbursements 610 900 650
Receipts less disbursements (20) (220) 240
(b)
Jan. Feb. Mar.
₹ ₹ ₹
Additional borrowings 20 220 (240)
Cumulative borrowings (Opening balance of 400) 420 640 400
The amount of financing peaks in February owing to the need to pay for purchases made
the previous month and higher labour costs. In March, substantial collections are made on
the prior month’s billings, causing large net cash inflow sufficient to pay off the additional
borrowings.
T E
(c) Proforma Balance Sheet, 31st March, 2020
I T U
Equity & liabilities
Amount
S T Assets
Amount

C I N(₹ in ‘000) (₹ in ‘000)

SJ
Equity shares capital 100 Net fixed assets 1,836
Retained earnings 1,529 Inventories 635
Long-term borrowings 450 Accounts receivables 620
Accounts payables 450 Cash and bank 50
Loan from banks 400
Other liabilities 212
3,141 3,141
Accounts receivable = Sales in March × 0.8 + Sales in February × 0.1
Inventories = ₹ 545 + Total purchases from January to March – Total sales from
January to March × 0.6
Accounts payable = Purchases in March
Retained earnings = ₹ 1,439 + Sales – Payment for purchases – Labour costs and –
Other expenses, all for January to March

CA Inter FM
| 12.21
Divya Jadi Booti
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 Cash Management

12 Dec’21
A garment trader is preparing cash forecast for first three months of calendar year 2021. His
estimated sales for the forecasted periods are as below:
January (₹ '000) February (₹ '000) March (₹ '000)
Total sales 600 600 800
(i) The trader sells directly to public against cash payments and to other entities on credit.
Credit sales are expected to be four times the value of direct sales to public. He expects
15% customers to pay in the month in which credit sales are made, 25% to pay in the next
month and 58% to pay in the next to next month. The outstanding balance is expected to
be written off.
(ii) Purchases of goods are made in the month prior to sales and it amounts to 90% of sales
and are made on credit. Payments of these occur in the month after the purchase. No
inventories of goods are held.
(iii) Cash balance as on 1st January, 2021 is ₹ 50,000.
(iv) Actual sales for the last two months of calendar year 2020 are as below:
November (₹ '000) December (₹ '000)

T E
Total sales 640 880

I T U
March, 2021. S T
You are required to prepare a monthly cash, budget for the three months from January to
[5]

C I N
Cash Budget SJ

Answer
Working Notes:
(1) Calculation of cash and credit sales (₹ in thousands)
Nov. Dec. Jan. Feb. Mar.
Total Sales 640 880 600 600 800
Cash Sales (1/5th of total sales) 128 176 120 120 160
Credit Sales (4/5th of total sales) 512 704 480 480 640

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 Cash Management

(2) Calculation of Credit Sales Receipts (₹ in thousands)

Month Nov. Dec. Jan. Feb. Mar.
Forecast Credit sales (Working note 1) 512.00 704.00 480.00 480.00 640.00
Receipts:
15% in the month of sales 72.00 72.00 96.00
25% in next month 176.00 120.00 120.00
58% in next to next month 296.96 408.32 278.40
Total 544.96 600.32 494.40
Cash Budget (₹in thousands)
Nov. Dec. Jan. Feb. Mar.
Opening Balance (A) 50.00 174.96 355.28
Sales 640.00 880.00 600.00 600.00 800.00
Receipts:
Cash Collection (Working note 1) 120.00 120.00 160.00
Credit Collections (Working note 2) 544.96 600.32 494.40
Total (B) 664.96 720.32 654.40
Purchases (90% of sales in the month prior to 540
T E
540 720
sales)
I T U
Payments:
S T
C I
Payment for purchases (next month)
N 540 540 720

Total (C)
SJ
Closing balance (D) = (A + B – C)
540 540 720
174.96 355.28 289.68

13 MTP Nov’22
A company was incorporated w.e.f. 1st April, 2021. Its authorised capital was ₹ 1,00,00,000
divided into 10 lakh equity shares of ₹ 10 each. It intends to raise capital by issuing equity shares
of ₹ 50,00,000 (fully paid) on 1st April. Besides this, a loan of ₹ 6,50,000 @ 12% per annum will be
obtained from a financial institution on 1st April and further borrowings will be made at same
rate of interest on the first day of the month in which borrowing is required. All borrowings will
be repaid along with interest on the expiry of one year. The company will make payment for the
following assets in April.

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 Cash Management

Particulars (₹)
Plant and Machinery 10,00,000
Land and Building 20,00,000
Furniture 5,00,000
Motor Vehicles 5,00,000
Stock of Raw Materials 5,00,000
The following further details are available:
(1) Projected Sales (April-September):
(₹)
April 15,00,000
May 17,50,000
June 17,50,000
July 20,00,000
August 20,00,000
September 22,50,000
(2) Gross profit margin will be 25% on sales.
T E
following sales.
I T U
(3) The company will make credit sales only and these will be collected in the second month

S T
(4) Creditors will be paid in the first month following credit purchases. There will be credit
purchases only.
C I N
SJ
(5) The company will keep minimum stock of raw materials of ₹ 5,00,000.
(6) Depreciation will be charged @ 10% per annum on cost on all fixed assets.
(7) Payment of miscellaneous expenses of ₹ 50,000 will be made in April.
(8) Wages and salaries will be ₹ 1,00,000 each month and will be paid on the first day of the
next month.
(9) Administrative expenses of ₹ 50,000 per month will be paid in the month of their incurrence.
(10) No minimum cash balance is required.
You are required to PREPARE the monthly cash budget (April-September), the projected Income
Statement for the 6 months period and the projected Balance Sheet as on 30th September,
2021.

Monthly Cash Budget

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 Cash Management

Answer
Monthly Cash Budget (April-September)
April May June July August September
Opening cash balance - 10,50,000 - 1,37,500 5,25,000 7,25,000
A. Cash inflows
Equity shares 50,00,000 - - - - -
Loans (Refer to working 6,50,000 1,25,000 - - - -
note 1)
Receipt from debtors - - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 11,75,000 15,00,000 18,87,500 22,75,000 27,25,000
B. Cash Outflows
Plant and Machinery 10,00,000 - - - - -
Land and Building 20,00,000 - - - - -
Furniture 5,00,000 - - - - -
Motor Vehicles 5,00,000 - - - - -
Stock of raw materials 5,00,000 - - - - -
(Minimum stock)
T E
Miscellaneous expenses 50,000 -
I
-
T U- - -
Payment to creditors for
credit purchases (Refer T
- 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
S
to working note 2)
C I N
Wages and salaries
Admn. expenses SJ - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
50,000 50,000 50,000 50,000 50,000 50,000
Total :(B) 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000
Closing balance (A) – (B) 10,50,000 - 1,37,500 5,25,000 7,25,000 11,75,000
Budgeted Income Statement for six-month period ending 30th September
Particulars (₹) Particulars (₹)
To Purchases 83,37,500 By Sales 1,12,50,000
To Wages and Salaries 6,00,000 By Closing stock 5,00,000
To Gross profit c/d 28,12,500
1,17,50,000 1,17,50,000
To Admn. expenses 3,00,000 By Gross profit b/d 28,12,500
To Depreciation 2,00,000
(10% on ₹ 40 lakhs for six
months)
To Accrued interest on loan 45,250
(Refer to working note 3)
To Miscellaneous expenses 50,000

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 Cash Management

To Net profit c/d 22,17,250

28,12,500 28,12,500
Projected Balance Sheet as on 30th September, 2021
Amount Amount
Liabilities Assets
(₹) (₹)
Share Capital: Fixed Assets:
Authorised Land and Building 20,00,000
capital
Less: Depreciation 1,00,000 19,00,000
10,00,000 equity 1,00,00,000 Plant and Machinery 10,00,000
shares of ₹ 10
each
Issued, Less: Depreciation 50,000 9,50,000
subscribed
and paid up
capital
5,00,000 50,00,000 Furniture 5,00,000
equity shares of
T E
₹ 10 each
Reserve
I T U
Less: Depreciation 25,000 4,75,000
and Surplus:
S T
Profit and Loss I N
22,17,250 Motor Vehicles
C
5,00,000
Long-term loans
Current liabilities
and provisions:
SJ 7,75,000 Less: Depreciation
Current Assets:
25,000 4,75,000 38,00,000

Sundry creditors 15,87,500 Stock 5,00,000

Accrued interest 45,250 Sundry debtors 42,50,000
Outstanding 1,00,000 Cash 11,75,000 59,25,000
expenses
17,32,750
97,75,000 97,75,000
Working Notes:
Subsequent Borrowings Needed (₹)
April May June July August September
A. Cash Inflow
Equity shares 50,00,000
Loans 6,50,000
Receipt from debtors - - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 - 15,00,000 17,50,000 17,50,000 20,00,000

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 Cash Management

B. Cash Outflow
Purchase of fixed assets 40,00,000
Stock 5,00,000
Miscellaneous expenses 50,000
Payment to creditors - 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
Wages and salaries - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
Administrative 50,000 50,000 50,000 50,000 50,000 50,000
expenses
Total 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000
Surplus/ (Deficit) 10,50,000 (11,75,000) 1,37,500 3,87,500 2,00,000 4,50,000
Cumulative balance 10,50,000 (1,25,000) 12,500 4,00,000 6,00,000 10,50,000
1. There is shortage of cash in May of ₹ 1,25,000 which will be met by borrowings in May.
2. Payment to Creditors
Purchases = Cost of goods sold - Wages and salaries
Purchases for April = (75% of 15,00,000) - ₹ 1,00,000 = ₹ 10,25,000
(Note: Since gross margin is 25% of sales, cost of manufacture i.e. materials plus wages and
salaries should be 75% of sales)
T E
I T U
Hence, Purchases = Cost of manufacture minus wages and salaries of ₹ 1,00,000)

S T
The creditors are paid in the first month following purchases.
I N
Therefore, payment in May is ₹ 10,25,000
C
April
SJ
The same procedure will be followed for other months.
(75% of 15,00,000) - ₹ 1,00,000 = ₹ 10,25,000
May (75% of 17,50,000) - ₹ 1,00,000 = ₹ 12,12,500
June (75% of 17,50,000) - ₹ 1,00,000 = ₹ 12,12,500
July (75% of 20,00,000) - ₹ 1,00,000 = ₹ 14,00,000
August (75% of 20,00,000) - ₹ 1,00,000 = ₹ 14,00,000
September (75% of 22,50,000) - ₹ 1,00,000 = ₹ 15,87,500
Minimum Stock ₹ 5,00,000
Total Purchases ₹ 83,37,500
3. Accrued Interest on Loan
12% interest on ₹ 6,50,000 for 6 months 39,000
Add: 12% interest on ₹ 1,25,000 for 5 months 6,250
45,250

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