(Preparation of a cash budget) Harrison Printing has projected its sales for the
ID: 2612374 • Letter: #
Question
(Preparation of a cash budget) Harrison Printing has projected its sales for the first eight months of 2011 as follows:
January
$100,000
May
$275,000
February
120,000
June
200,000
March
150,000
July
200,000
April
300,000
August
180,000
Harrison collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the remaining 30 percent two months following the sale. During November and December of 2010, Harrison’s sales were $220,000 and $175,000, respectively.
Harrison purchases raw materials two months in advance of its sales equal to 65 percent of its final sales price. The supplier is paid one month after delivery. Thus, purchases for April sales are made in February and payment is made in March.
In addition, Harrison pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter beginning in March. The company’s cash balance as of December 31, 2010, was $22,000; a minimum balance of $20,000 must be maintained at all times to satisfy the firm’s bank line of credit agreement. Harrison has arranged with its bank for short-term credit at an interest 586587rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm were to need to borrow $50,000 during the month of April, then it would pay $500 (= .01 × $50,000) in interest during May. Finally, Harrison follows a policy of repaying its outstanding short-term debt in any month in which its cash balance exceeds the minimum desired balance of $20,000.
a. Harrison needs to know what its cash requirements will be for the next six months so that, if necessary, it can renegotiate the terms of its short-term credit agreement with its bank. To analyze this problem, the firm plans to evaluate the impact of a ±20 percent variation in its monthly sales efforts. Prepare a six-month cash budget for Harrison and use it to evaluate the firm’s cash needs.
b. Harrison has a $200,000 note due in June. Will the firm have sufficient cash to repay the loan?
January
$100,000
May
$275,000
February
120,000
June
200,000
March
150,000
July
200,000
April
300,000
August
180,000
Explanation / Answer
Calculations are as follows
It is assumed that the cash available over and above minimum balance is used for repayment of Financing taken for maintaining minimum cash balance
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.