The Art of Mathematics in Business. Dr Jae K Shim

borrowing must be sufficient to cover the cash shortfall and to provide for the minimum cash balance of $10,000

      

All borrowings and repayments must be in multiples of $1,000 amounts, and interest is 10 percent per annum.

      

Interest is computed and paid on the principal as the principal is repaid.

      

All borrowings take place at the beginning of a quarter, and all repayments are made at the end of a quarter.

      

No investment option is allowed in this example. The loan is self-liquidating in the sense that the borrowed money is used to obtain resources that are combined for sale, and the proceeds from sales are used to pay back the loan.

      Note: To be useful for cash planning and control, the cash budget must be prepared on a monthly basis.

      The Putnam Company – Cash Budget

*	$19,000 (from the balance sheet 20A).
**	The company desires to maintain a $ 10,000 minimum cash balance at the end of each quarter. Therefore, borrowing must be sufficient to cover the cash shortfall of $19,325 and to provide for the minimum cash balance of $10,000, for a total of $29,325.
***	The interest payments relate only to the principal being repaid at the time it is repaid. For example, the interest in quarter 3 relates only to the interest due on the $30,000 principal being repaid from quarter 1 borrowing and on the $15,000 principal being repaid from quarter 2 borrowing. Total interest being paid is $3,000, shown as follows:
	$30,000 × 10% × 3/4= $2,250
	$15,000 × 10% × 2/4=750
	+ $35,000 × 10% × 3/4= $3,000

      The Budgeted Income Statement

      The budgeted income statement summarizes the various component projections of revenue and expenses for the budgeting period. However, for control purposes the budget can be divided into quarters or even months depending on the need.

Schedule 9

      The Putnam Company – Budgeted Income Statement

*

Cost of goods manufactured = total manufacturing cost + beginning work in process inventory – ending work in process inventory. Since there are no work in process inventories in this illustration, cost of goods manufactured = total manufacturing cost. Thus cost of goods manufactured = direct materials used + direct labor + factory overhead = $61,000 (12,200 ibs. @$5 per lbs.—Schedule 3) + $305,000 (Schedule 4) + $134,200 (Schedule 5) = $500,200

**

Estimated

      The Budgeted Balance Sheet

      The budgeted balance sheet is developed by beginning with the balance sheet for the year just ended and adjusting it, using all the activities that are expected to take place during the budgeting period. Some of the reasons why the budgeted balance sheet must be prepared are:

      

It could disclose some unfavorable financial conditions that management might want to avoid.

      

It serves as a final check on the mathematical accuracy of all the other schedules.

      

It helps management perform a variety of ratio calculations.

      

It highlights future resources and obligations.

      We can construct the budgeted balance sheet by using:

      

The December, 20A balance sheet (Schedule 10)

      

The cash budget (Schedule 8)

      

The budgeted income statement (Schedule 9).

      Putnam’s budgeted balance sheet for December 31, 20B, is presented below. Supporting calculations of the individual statement accounts are also provided. To illustrate, we will use the following balance sheet for the year 20A.

Schedule 10

      The Putnam Company – Balance Sheet

December 31, 20A
Assets
Current assets:
Cash	$ 19,000
Accounts receivable	100,000
Materials inventory (490 lbs.)	2,450
Finished goods inventory (200 units)	16,400
Total current assets		$137,850
Plant and equipment:
Land	30,000
Buildings and equipment	250,000
Accumulated depreciation	(74,000)
Plant and equipment, net		206,000
Total assets		$343,850
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable (raw materials)	$ 6,275
Income tax payable	60,000
Total current liabilities		$66,275
Stockholders’ equity:
Common stock, no par	$200,000