How did you calculate the numberical values in the Sharpe Corporation Cash Budge

Question

How did you calculate the numberical values in the Sharpe Corporation Cash Budget problem in Chapter 4 of the Financial Management Book 10th edition?



Financial Forecasting, Planning, and Budgeting - Chapter 4 (Set A) pp. 107-136

4-6 A p. 124
(Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows:

January $ 90,000 May $300,000
February 120,000 June 270,000
March 135,000 July 225,000
April 240,000 August 150,000

Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following sale, and 30 percent is collected in the second month following sale. November and December sales for 2003 were $220,000 and $175,000, respectively.

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, purchases for April sales are made in February and payment is made in March.

In addition, Sharpe 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 at December 31, 2003, was $22,000; 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 (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.
a. Prepare a cash budget for Sharpe covering the first seven months of 2004.
b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?


Nov Dec Jan Feb Mar Apr May June July
Sales $220,000 $175,000 $90,000 $120,000 $135,000 $240,000 $300,000 $270,000 $225,000
Collections:
Month of sale (10%) 9,000 12,000 13,500 24,000 30,000 27,000 22,500
First month (60%) 105,000 54,000 72,000 81,000 144,000 180,000 162,000
Second month (30%) 66,000 52,500 27,000 36,000 40,500 72,000 90,000
Total Collections 180,000 118,500 112,500 141,000 214,500 279,000 274,500
Purchases 72,000 81,000 144,000 180,000 162,000 135,000 90,000
Payments (one month lag) 72,000 81,000 144,000 180,000 162,000 135,000 90,000
Cash Receipts
(collections) 180,000 118,500 112,500 141,000 214,500 279,000 274,500
Cash Disbursements
Purchases 72,000 81,000 144,000 180,000 162,000 135,000 90,000
Rent 10,000 10,000 10,000 10,000 10,000 10,000 10,000
Other Expenditures 20,000 20,000 20,000 20,000 20,000 20,000 20,000
Tax Deposits 22,500 22,500
Interest on Short-Term
Borrowing _______ _______ _______ _______ 605 386 _______
Total Disbursements $102,000 $111,000 $196,500 $210,000 $192,605 $187,886 $120,000
Net Monthly Change $78,000 $7,500 ($84,000) ($69,000) $21,895 $91,114 $154,500
Beginning Cash Balance 22,000 100,000 107,500 23,500 15,000 15,000 67,509
Additional Financing
Needed (Repayment) ________ _______ ________ 60,500 -21,895 -38,605 _______
Ending Cash Balance $100,000 $107,500 $23,500 $15,000 $15,000 $67,509 $222,009
Cumulative Borrowing 0 0 0 $60,500 $38,605 0 0

Tazgirl

Explanation / Answer

Cash Collection from Sales

10 percent is for cash - 10% of sales will be collected inthe month of sales. January sales = $90,000 *.10 = $9000 will be collected in january.

Another 60 percent is collected in the month following sale which means 60% of jan. sales will be collected in month of feb. Like wise 60% of sales of dec. will be collected in jan. $1,75,000 * .60 = $105,000

30 percent is collected in the second month following sale which means 30% of jan sales will be collected in March.Likewise 30% of Nov. sale will be collected in jan. $2,20,000 * .30 = $66,000

Total sales collected in jan = $9000 + $105,000 + $66,000 = $180,000

Similarly,You can calculate for other months.

Cash disbursement

Purchases are made 60% of next month sales

January's purchases will be 60% of feb.sales = Feb original sales is $120,000 * .60 = $72,000

$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 . March and June are tax prepayments months.

Net monthly change = total collection - total disburstment

a minimum balance of $15,000 must be maintained at all times.

Jan,feb march have suffiicient cash to comply with the above mentioned condition

In month of april net monthly change is negative after adding up opening balance ,remaining bal. is still negative. Net monthly change is -$69000 + beginning balance is 23500 ,net balance is -45500.

Short term financing need should be met by borrowing $45500 + $15000 = $60,500

These funds would be borrowed at the beginning of April with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.

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.

In may net monthly change is $21,895 and beginning bal.is $15,000 ,it is satisfying the condition of maintaining $15,000 .amount of net monthly change can be use in making partly payment of short term loan borrowed $60,500 i.e $21,895.

The remaining balance of loan = $60,500 - $21,895 = $38,605

Interest = $38,605 * .12 * 1/12 = $386 paid in june.

In june we will pay the remaining loan.

Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?


In july available cash is $154,500 (net monthly change) + $67,509(begiinning bal.) =$222,009

Notes payable due in July that must be repaid . The firm will have ample cash to repay the notes.

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