( Cash budget ) The Sharpe Corporation’s projectedsales for the first eight mont
ID: 2770722 • Letter: #
Question
(Cash budget) The Sharpe Corporation’s projectedsales 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 60percent is collected in the month following sale, and 30 percent iscollected in the second month following sale. November and Decembersales for 2003 were $220,000 and $175,000, respectively.
Sharpe purchases its raw materials two months in advance of itssales equal to 60 percent of their final sales price. The supplieris paid one month after it makes delivery. For example, purchasesfor April sales are made in February and payment is made inMarch.
In addition, Sharpe pays $10,000 per month for rent and $20,000each month for other expenditures. Tax prepayments of $22,500 aremade 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 alltimes. Assume that any short-term financing needed to maintain thecash balance is paid off in the month following the month offinancing if sufficient funds are available. Interest on short-termloans (12 percent) is paid monthly. Borrowing to meet estimatedmonthly
cash needs takes place at the beginning of the month. Thus, ifin the month of April the firm expects to have a need for anadditional $60,500, these funds would be borrowed at the beginningof 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 coveringthe first seven months of 2004.
Explanation / Answer
( Cash budget ) The Sharpe Corporation’s projectedsales for the first eight mont
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