# Preparing cash budgets appendix

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1 p r e p a r i n g c a s h b u d g e t s a p p e n d i x A 1 Preparing cash budgets appendix this appendix covers... This appendix explains in more detail how to calculate the value of closing receivables and payables. It also shows how data on non-current assets can be used to calculate the amount paid for additions or received from disposals.

2 A 2 c a s h m a n a g e m e n t t u t o r i a l C A L C U L AT I O N O F C L O S I N G R E C E I VA B L E S A N D PAYA B L E S We saw in Chapter 2 that there are links between the trade receivables and trade payables figures shown in the statement of financial position and the cash budget. In the case studies for both Moore Trading on pages and Crossroads Catering on pages we used data from statements of financial position to help us establish the figures to use in the cash budget. We are now going to ensure that we can also calculate the closing trade receivables and trade payables figures that would appear in a budgeted statement of financial position for a date immediately following a cash budget. These figures that we need will be ones that are not used as receipts or payments in the cash budget because they would arise after the period instead they are amounts owing to or by the organisation at the period end. You may like to think of these figures as the ones that fall off the end of the cash budget. We will use the following case study to demonstrate how the figures work. Case Study C A S C A D E L I M I T E D s i t u a t i o n Credit sales and purchases in the first three months of the year is estimated as follows: January February March Credit sales 18,400 19,600 17,900 Credit purchases 14,500 15,100 15,600 The expected pattern for receipts from credit sales and payments for purchases are as follows: Month after transaction Following month Receipts from credit sales 60% 40% Payments for purchases 70% 30%

3 p r e p a r i n g c a s h b u d g e t s a p p e n d i x A 3 r e q u i r e d (a) Calculate the receipts and payments arising from these figures that would appear in a cash budget for February and March. (b) Calculate the trade receivables and trade payables amounts as at 31 March. s o l u t i o n The months when the sales should be received can be calculated using a table: February March April May January sales 60% 11,040 January sales 40% 7,360 February sales 60% 11,760 February sales 40% 7,840 March sales 60% 10,740 March sales 40% 7,160 Total receipts 11,040 19,120 18,580 7,160 Use in cash budget for February and March Total equals trade receivables at end of March The totals relating to February and March would be used directly in a cash budget for the first quarter of the year. The amounts shown as being received in April and May arise entirely from the sales in the first quarter, and therefore when added together give the trade receivables figure for 31 March ( 18, ,160 = 25,740). We can take the same approach to calculate the payments and trade payables figures: February March April May January purchases 70% 10,150 January purchases 30% 4,350 February purchases 70% 10,570 February purchases 30% 4,530 March purchases 70% 10,920 March purchases 30% 4,680 Total payments 10,150 14,920 15,450 4,680 Use in cash budget for February and March Total equals trade payables at end of March The trade payables amount at 31s March is therefore ( 15, ,680 = 20,130).

4 A 4 c a s h m a n a g e m e n t t u t o r i a l In Chapter 2 we used formulas to calculate cash receipts and payments. These formulas can often be used to calculate closing receivables or payables balances, depending on the data provided: Receipts from credit sales = opening trade receivables + credit sales closing trade receivables Payments for credit purchases = opening trade payables + credit purchases closing trade payables By manipulating these formulas you will be able to calculate the closing figures if you have all the other data. For example, suppose we have the following figures: receipts from credit sales 140,600 opening trade receivables 42,350 credit sales 138,400. We can see that by using the formula: 140,600 = 42, ,400 closing trade receivables This becomes: 140,600 = 180,750 closing trade receivables We can then see that closing trade receivables must be the difference between 180,750 and 140,600. This gives us the answer of 40,150.

6 A 6 c a s h m a n a g e m e n t t u t o r i a l c a l c u l a t i o n o f a m o u n t s r e c e i v e d o n d i s p o s a l o f n o n - c u r r e n t a s s e t s If we know how the profit or loss on the disposal of non-current assets is calculated we can use this information to work out the proceeds of disposal. Disposal proceeds - carrying amount of asset disposed of = profit on disposal Remember that carrying amount is usually cost minus accumulated depreciation. If the disposal proceeds are lower than the carrying value the result is a loss on disposal. For example, suppose we are told that: An item disposed of had a cost of 35,000 The item had accumulated depreciation of 23,480 The disposal resulted in a loss of 3,100 We can calculate the carrying amount by deducting the accumulated depreciation from the cost ( 35,000-23,480 = 11,520). Since a loss is incurred we know that the proceeds are lower than the carrying amount. The proceeds will be the carrying amount minus the loss. The proceeds must be 11,520-3,100 = 8,420. Assuming this amount is received in cash it would appear in a cash statement or budget.

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