- 20 Marks
Question
- Mention any three (3) uses of a Cash Budget.
- THE CATHEDRAL commences business on January 1, 2020 and introduces GHS 1,000,000 cash as capital. He also borrows GHS 400,000 from his brother at 10% per annum interest, payable half-yearly in June and December. He makes the following estimates about the first six months of 2020:
| Fixed Assets | GHS 1,000,000 purchases for cash in January 2020. |
|---|---|
| Sales | GHS 600,000 per month, two month’s credit to be given to customers. |
| Purchases | GHS 800,000 in January and GHS 400,000 per month thereafter, suppliers will allow one month’s credit. |
| Expenses | GHS 40,000 per month average, excluding interest payable in the month in which they are incurred. |
| Drawings | GHS 10,000 per month. |
You are required to prepare a Cash Forecast for the business of THE CATHEDRAL for the first six months of 2020 which shows the Cash Balance at the end of each month.
Answer
- Uses of Cash Budget:
- Planning liquidity to avoid shortages (e.g., meet BoG liquidity guidelines).
- Forecasting surpluses for investment or debt repayment.
- Controlling cash flows by comparing actual vs. budget, aiding decisions.
(3 marks)
- Cash Forecast for THE CATHEDRAL (Jan-Jun 2020, GHS’000):
| Jan | Feb | Mar | Apr | May | Jun | |
|---|---|---|---|---|---|---|
| Receipts: | ||||||
| Capital | 1,000 | |||||
| Loan | 400 | |||||
| Sales (2m credit) | 600 | 600 | 600 | 600 | ||
| Total Receipts | 1,400 | 0 | 600 | 600 | 600 | 600 |
| Payments: | ||||||
| Fixed Assets | 1,000 | |||||
| Purchases (1m credit) | 800 | 400 | 400 | 400 | 400 | |
| Expenses | 40 | 40 | 40 | 40 | 40 | 40 |
| Drawings | 10 | 10 | 10 | 10 | 10 | 10 |
| Interest (10% on 400 for 6m = 20, paid Jun) | 20 | |||||
| Total Payments | 1,050 | 850 | 450 | 450 | 450 | 470 |
| Net Cash Flow | 350 | -850 | 150 | 150 | 150 | 130 |
| Opening Balance | 0 | 350 | -500 | -350 | -200 | -50 |
| Closing Balance | 350 | -500 | -350 | -200 | -50 | 80 |
Notes: Sales receipts lag 2 months (Jan sales received Mar). Purchases paid next month. Interest half-yearly in Jun. Negative balances indicate overdraft need, common in startups; in Ghana, aligns with working capital management for BoG compliance.
- Tags: Cash Budget Uses, Cash Forecast Preparation, Receipts Payments
- Level: Level 1
- Topic: Cash forecast
- Series: JULY 2020
- Uploader: Samuel Duah