The Company has projected sales as follows: Sales September October November Dec

Question

The Company has projected sales as follows: Sales September October November December January $          70,000 $          80,000 $          90,000 $      1,00,000 $          70,000 Other information: 1. ACME collects 70% of its sales in the month of the sale, 20% in the second month and 10% in the third month. 2. ACME purchases and pays for raw materials one month in advance of its sales. The purchases are 50% of sales. 3. ACME pays $8,000 rent each month for its factory. 4. ACME pays $5,000 other costs each month. 5. A tax prepayment of $40,000 is due in October. 6. ACME has a line of credit with it's local bank for $500,000 at 12% interest, and must maintain a bank balance of $10,000 7. At September 30th, it had borrowed $40,000 on its LOC, and had a bank balance of $10,000 a. Prepare a cash budget for the last quarter of the year (October - December) b. Will the ACME have its LOC paid off by 12/31? The Company has projected sales as follows: Sales September October November December January $          70,000 $          80,000 $          90,000 $      1,00,000 $          70,000 Other information: 1. ACME collects 70% of its sales in the month of the sale, 20% in the second month and 10% in the third month. 2. ACME purchases and pays for raw materials one month in advance of its sales. The purchases are 50% of sales. 3. ACME pays $8,000 rent each month for its factory. 4. ACME pays $5,000 other costs each month. 5. A tax prepayment of $40,000 is due in October. 6. ACME has a line of credit with it's local bank for $500,000 at 12% interest, and must maintain a bank balance of $10,000 7. At September 30th, it had borrowed $40,000 on its LOC, and had a bank balance of $10,000 a. Prepare a cash budget for the last quarter of the year (October - December) b. Will the ACME have its LOC paid off by 12/31?

Explanation / Answer

a) Cash Budget ( October - December) October November December Total Opening Balance - bank 10000 22000 45000 77000 LOC 40000 40000 Cash Collected - Sales ( Refer Note 1) 70000 86000 96000 252000 Total Cash Inflow 120000 108000 141000 369000 Cash Payments     Purchases ( Refer note 2) 45000 50000 35000 130000     Rent paid 8000 8000 8000 24000      Other Cost 5000 5000 5000 15000      Tax prepayment 40000 40000 Total Cash outflow 98000 63000 48000 209000 closing cash balance ( A - B) 22000 45000 93000 160000 b) Yes ACME will be able to pay off its LOC + interest by 31/12 , because the   balance as on 31/12 is 93000 and amount ro be paid for LOC is 40000+ Interest (40000 * 12% / 4) Hence total amount payable forLOC = 40000 + 1200 = 41200 After paying off theamount of 41200 for LOC ,there will be still adequate closing balance ( 93000 -41200 = 51800) Note 1 September October November December January Sales 70000 80000 90000 100000 70000 Cash Collected          Current Month- 70% 56000 63000 70000           2nd month - 20% 14000 16000 18000           3rd Month -10% 0 7000 8000 Total Cash collected 70000 86000 96000 As august sale not provided , 3rd month amount cant be determined for October Note 2 Purchases requirement - 50% of sales 35000 40000 45000 50000 35000 Cash paid -1 month in advance 45000 50000 35000

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