Wickford Company\'s financial managers are meeting with the company\'s bank to r

Question

Wickford 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:

• Wickford's total sales for each month were first calculated in the sales budget and are reflected on the
first line of the cash budget.
• Wickford's sales are made on credit with terms of 2/10, net 30. Wickford's experience is that 25% is
collected from customers who take advantage of the discount, 65% 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 Wickford's finished product. The purchases are generally made one
month in advance of the sale, and Wickford 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 17% 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 Wickford's targeted cash balance is $300, and the estimated cash on hand on July 1 is $295.

Wickford Company Cash Budget For the Six Months Ended December 31, Year 1 $ millions) October November December June $1,078 495 August September $1,133 520 August September $1,045 $1,155 535 Credit sales $1,100 $1,188 $1,210 Credit purchases October November December Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously 291 751 278 296 722 736 772 108 $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 $1,095 $1,184 500 535 187 189 193 | 206 1,100 | $845 $1,904 $840 $856 Total cash disbursements Net cash flow (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $789 $306 526 $832 $231 $245 $315 $328 598 $926 300 $626 -$794 $283 300 $526 $598 300 | $226 $532 $298 Use the information provided in the budget to complete the following sentences Wickford 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, Wickford will to end the year with a cash and a cash . Wickford Company will want a credit line of at least $ to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to $ in short-term marketable securities

Explanation / Answer

may

June

july

august

september

october

november

december

credit sales

1045

1078

1100

1111

1133

1155

1188

1210

credit purchase

495

500

510

520

535

545

1111*45%

cash receipt

july

august

september

october

november

december

collection from this month sale

1100*25%*98%

270

272

278

283

291

296

collection from previous month sales

1078*65%

701

715

722

736

751

772

collection from two months previous

1045*10%

105

108

110

111

113

116

total cash receipts

1076

1095

1110

1130

1155

1184

cash disbursement

payment for credit purchase

1155*45%

495

500

510

520

535

545

wages and salaries

1155*17%

187

189

193

196

202

206

rent

44

44

44

44

44

44

other expenses

1155*5%

55

56

57

58

59

61

TAXES

64

67

payment for plant construction

1100

total cash disbursement

845

789

1904

885

840

856

net cash flow

receipts-disbursement

231

306

-794

245.00

315

328

beginning cash balance

295

526

832

38

283

598

ending cash balance

526

832

38

283

598

926

target minimum cash balance

300

300

300

300

300

300

surplus/shortfall cash

226

532

-262

-17

298

626

1-

generate

1184

2-

1184

3-

balance

926

4-

926

5-

surplus

6-

626

7-

-262

8-

1403

1403 = 1682-279

1682

226+532+298+626

279

262+17

may

June

july

august

september

october

november

december

credit sales

1045

1078

1100

1111

1133

1155

1188

1210

credit purchase

495

500

510

520

535

545

1111*45%

cash receipt

july

august

september

october

november

december

collection from this month sale

1100*25%*98%

270

272

278

283

291

296

collection from previous month sales

1078*65%

701

715

722

736

751

772

collection from two months previous

1045*10%

105

108

110

111

113

116

total cash receipts

1076

1095

1110

1130

1155

1184

cash disbursement

payment for credit purchase

1155*45%

495

500

510

520

535

545

wages and salaries

1155*17%

187

189

193

196

202

206

rent

44

44

44

44

44

44

other expenses

1155*5%

55

56

57

58

59

61

TAXES

64

67

payment for plant construction

1100

total cash disbursement

845

789

1904

885

840

856

net cash flow

receipts-disbursement

231

306

-794

245.00

315

328

beginning cash balance

295

526

832

38

283

598

ending cash balance

526

832

38

283

598

926

target minimum cash balance

300

300

300

300

300

300

surplus/shortfall cash

226

532

-262

-17

298

626

1-

generate

1184

2-

1184

3-

balance

926

4-

926

5-

surplus

6-

626

7-

-262

8-

1403

1403 = 1682-279

1682

226+532+298+626

279

262+17

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