6. Cash budget Aa Aa Mellon Company\'s financial managers are meeting with the c

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6. Cash budget Aa Aa Mellon Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year The following budget assumptions were used to construct the budget: Mellon's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. * Mellon's sales are made on credit with terms of 2/ 10, net 30. Mellon's experience is that 20% is collected from customers who take advantage of the discount, 70% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. * The cost of materials averages 45% of Mellon's finished product. The purchases are generally made one month in advance of the sale, and Mellon pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $545 ($1,210 million x 0.45), and this amount would be paid in July * Other cash expenses include wages and salaries at 19% of sales, monthly rent of $44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September .Assume that Mellon's targeted cash balance is $300, and the estimated cash on hand on July 1 is $272 Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) October November May $1,045 August September July $1,100 Credit sales Credit purchases 1,078 495 $1,155 $1,188 $1,210 July August SeptemberOctober November December Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously 233 809 237 832 116 $1,185 108 $1,110 $1,130 $1,155 Total cash receipts Cash disbursements Payments for credit purchases Wages and salaries Rent Other expenses Taxes Payment for plant construction $1,096 495 500 510 535 545 209 226 56 59 Total cash disbursements Net cash flow (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $867 1,926 $864 $285 $222 $291 172 $463 300 $163 305 $209 272 $481 -$816 766 $172 300 -$128 $768 300 468 $466 Use the information provided in the budget to complete the following sentences. Mellon Company will be able to invest in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Mellon will Mellon Company will want a credit line of at least $ expect that they will be able to invest up to$ and a cash to end the year with a cash to cover the month with the greatest shortfall, and the financial managers can tell the bank to in short-term marketable securities

Explanation / Answer

Part A)

The completed cash budget is prepared as below:

_____

Mellon Company will be able to invest in short term marketable securities in some months and will need to borrow to cover cash requirements in others in the last six months of the year, Mellon will spend $496M (209+285-816+222+291+305) to end the year with a cash balance of $768M and cash surplus of $468M (refer to surplus (shortfall) cash section in December). Mellon Company will want a credit line of at least $350M (refer to surplus (shortfall) cash section in September) to cover the month with the greatest shortfall, and the financial mangers can tell the bank to expect that they will be able to invest up to $468M in short term marketable securities (refer to surplus (shortfall) cash section in December).

Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 May June July August September October November December Credit Sales 1,045 1,078 1,100 1,111 1,133 1,155 1,188 1,210 Credit Purchases 495 500 510 520 535 545 July August September October November December Cash Receipts Collections from Month's Sales 216 218 222 226 233 237 Collections from Previous Month's Sales 755 770 778 793 809 832 Collections from Sales Two Months Previously 105 108 110 111 113 116 Total Cash Receipts 1,076 1,096 1,110 1,130 1,155 1,185 Cash Disbursements Payment for Credit Purchases 495 500 510 520 535 545 Wages and Salaries 209 211 215 219 226 230 Rent 44 44 44 44 44 44 Other Expenses 55 56 57 58 59 61 Taxes 64 67 Payment for Plant Construction 1,100 0 Total Cash Disbursements 867 811 1926 908 864 880 Net Cash Flow 209 285 -816 222 291 305 (Receipts - Disbursements) Beginning Cash Balance 272 481 766 -50 172 463 Ending Cash Balance 481 766 -50 172 463 768 Target (Minimum) Cash Balance 300 300 300 300 300 300 Surplus (Shortfall) Cash 181 466 -350 -128 163 468

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