A company is planning its cash needs for the third quarter of 2012, and the foll
ID: 2464294 • Letter: A
Question
A company is planning its cash needs for the third quarter of 2012, and the following information is available to assist in preparing a cash budget. Budgeted income statements for July through October 2012 are as follows:
July
August
September
October
Sales
18000
24000
28000
36000
Cost of Goods Sold
-10000
-14000
-16000
-20000
Gross Profit
8000
10000
16000
16000
Less Other Expenses
Selling
2300
3000
3400
4200
Administrative
2600
3000
3200
3600
Total
-4900
-6000
-6600
-7800
Net Income
3100
4000
5400
8200
Additional information follows:
1 – Other expenses, which are paid monthly, include $1,000 of depreciation per month
2 – Sales are 30 percent for cash and 70 percent on credit
3 – Credit sales are collected 20 percent in the month of sale, 70 percent one month after sale, and 10 percent two months after sale. Ay sales were 415,000 and June sales were $16,000
4 – Merchandise is paid for 50 percent in the month of purchase; the remaining 50 percent is paid in the following month. Accounts payable for merchandise at June 30 totaled $6,000
5 – The company maintains its ending inventory levels at 25 percent of the cost of goods to be sold in the following month. The inventory at June 30 is $2,500
6 – An equipment note of $5,000 per month is being paid through August
7 – The company must maintain a cash balance of at least $5,000 at the end of each month. The cash balance on June 30 is $5,100
8 – The company can borrow from its bank as needed. Borrowing and repayments must be in multiples of $100. All borrowings take place at the beginning of a month, and all repayments are made at the end of a month. When the principal is repaid, interest on the repayment is also paid. The interest rate is 12 percent per year.
REQUIRED:
a – Prepare a monthly schedule of budgeted operating cash receipts for July, August, and September.
b – Prepare a monthly purchases budget and a schedule of budgeted cash payments for purchases for July, August, and September.
c – Prepare a monthly cash budget for July, August, and September. Show borrowings from the company’s bank and repayments to the bank as needed to maintain cash balance.
FORMAT:
a
Cash Collections Schedule
May
June
July
August
September
Sales
Cash
30%
Credit
70%
A/R Schedule
From credit sales:
May
$
June
$
$
July
$
$
$
August
$
$
September
$
Total credit collections
$
$
$
Cash Sales
$
$
$
Total Cash Collected:
$
$
$
b
Purchases and payments budget
Beginning inventory
Add Purchases
Subtract Ending inventory
Cost of Goods Sold
Payments from
June
$6,000
July
$
$
August
$
$
Sept
$
Total merchandise payments
$6,000
$
$
C
Monthly Cash Budget
July
August
Sept
Beginning Cash Balance:
Short-term bank financing principal:
Cash Collections:
Total Cash Available
$
$
$
Disbursements
Payments for merchandise
Expenses
Equipment Note
Disbursements: Subtotal
$
$
$
Financing
Short-term principal repayment
Interest Expense
Total Disbursements
$
$
$
Ending Cash Balance
$
$
$
Total quarterly financing:
total quarterly interest expense
July principal
$
August principal
$
Does the cash budget based on the given parameters provide the firm with the liquidity in needs in meeting operations for the quarter (and why)?
The CFO wants to know what is the impact of increasing the minimum monthly balance to $7,000. Provide a short but detailed response to the CFO on the impact of this change. Or course the CFO will expect to see the numerical values that support the response.
What is the impact of interest rate changes on the a) the budget as proposed, and b) the CFOs request for higher minimum cash balance?
July
August
September
October
Sales
18000
24000
28000
36000
Cost of Goods Sold
-10000
-14000
-16000
-20000
Gross Profit
8000
10000
16000
16000
Less Other Expenses
Selling
2300
3000
3400
4200
Administrative
2600
3000
3200
3600
Total
-4900
-6000
-6600
-7800
Net Income
3100
4000
5400
8200
Explanation / Answer
Details May June July August September Total October Sales 15,000 16,000 18,000 24,000 28,000 36,000 Cash Collection 4,500 4,800 5,400 7,200 8,400 10,800 Credit Collection 10,500 11,200 12,600 16,800 19,600 25,200 Collection Schedule July August September Total Collection of Credit Sales May 2,100 7,350 1,050 Collection of Credit Sales Jun 2,240 7,840 1,120 Collection of Credit Sales Jul 2,520 8,820 1,260 Collection of Credit Sales Aug 3,360 11,760 1,680 Collection of Credit Sales Sep 3,920 13,720 Collection of Credit Sales Oct 5,040 July August September Total Total Credit sales collection 11,410 13,300 16,940 41,650 Total Cash Collection 5,400 7,200 8,400 21,000 Total Operating Cash Collection 16,810 20,500 25,340 62,650 Details May June July August September Total October COGS 10,000 14,000 16,000 20,000 Add Closing Inventory 2,500 3,500 4,000 5,000 Less Opening Inventory 2,500 3,500 4,000 Total Merchandise purchase required 11,000 14,500 17,000 42,500 Merchandise Payment Budget 11,500 12,750 15,750 40,000 Cash Payment for other expenses(excluding depreciation) 3,900 5,000 5,600 14,500 Cash Budget July August September Total Opening Balance 5,100 5,010 5,060 Cash Receipts 16,810 20,500 25,340 62,650 Total Cash Avaialable 21,910 25,510 30,400 62,650 Disbursements Merchandise Payment 11,500 12,750 15,750 Other Expense Payment 3,900 5,000 5,600 Equipment Note 5,000 5,000 5,000 Total Disbursement 20,400 22,750 26,350 Cash Balance before Bank Loan 1,510 2,760 4,050 Bank Loan 3,500 2,300 1,000 Principal Repayment - Interest Repayment - Ending Cash Balance 5,010 5,060 5,050 July August September Total Bank Loan Principal outstanding 3,500 5,800 6,800 Interest Expense 35 58 68 161 If Minimum balance required is 7000 July August September Total Bank Loan Principal outstanding 5,500 7,800 8,800 Interest Expense 55 78 88 221 So the effect of keeping min balance of $7000 is that $2000 will be additioanl Principal for the quarter and $60 interest payment will be extra for the quarter.
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