The Shape Corporation\'s projected sales for the first eight months of 2011 are

Question

The Shape Corporation's projected sales for the first eight months of 2011 are as follows. Of Sharpe's sales, 10 percent is for cash, another 60 percent is collected in the month following the sales, and 30 percent is collected in the second month following the sales. November and December sales for 2010 were $220,100 and $175,800, respectivly. Sharpe purchases its raw materials two months in advance of its sales equal to 60 percent of their final sales price. The supplier is paid one month after it makes delivery. For example, purchese for April sales are made Feburary and payment is made in March. In addition, Sharpy pays 9,600 per month for rent and 20,200 each month for other expenditures. Tax prepayments of 21,500 are made each quarter, beggining in March. The company's cash balance at December 31, 2010, was 22,900; a minimum balance of 15,000 must be maintained at all times. Assume that any short-term financing needed to maintain the cash balance is paid off in the month following the month of financing if sufficient funds are available. Interest on short-term loans (10 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the begining of the month. Thus, if in the month of April the firm expects to have a need for andditional 56,130, these funds would be borrowed at the begining of April with interest of 468 (i.e., 10% x 1/12 x 56,130) owed for April being paid at the begining of May. a. Prepare a cash budget for Sharpe covering the first seven months of 2011. b. Sharpe has 199,600 in notes payable due in July that must be repaid or renegotiated for an extention. Will the firm have sufficiant cash to repay the noptes?

Explanation / Answer

Cash budgetpreparation requires analyzing the timing of thereceiptsandpaymentsespecially for sales and purchases. It is not possible to do the complete assignment, but I can try and help you to complete it.

1. Collection from Customers:
Prepare a schedule covering period for each month from November to July.

Record sales for each month as given in the question with break up of collection, i.e., 10%, 60% and 30%

Collections during any month will be recorded as:
10% of current month sales
60% of last month sales
30% of the second last month sales

For example in January 2004, the collection will be:
10% January Sales 9,000
60% Dec 2003 sales 132,000
30% Nov 2003 sales 52,500
Total collection 193,500

Similar exercise for payments to suppliers. The question has already mentioned the criteria that the purchases are 60% of the sales value. For January it will be 54,000 and will be purchased in Nov 2003, but paid for in February 2004. As such the payment in January 2004 will be for December sales.

I would suggest the headings for cash budget as:

RECEIPTS
Collection from Customers
Short term loan
Total receipts
DISBURSEMENTS
Payment to suppliers
Rent
Expenses
Taxation
Repayment of short term loan
Interest on loan
Repayment of Notes payable
Total payments
Surplus/(Deficit) Receipts less payments
Opening cash balance
Closing Cash balance

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