Dorothy Koehl recently leased space in the Southside Mall and opened a new busin
ID: 2774851 • Letter: D
Question
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,100 per month, and the rent is $2,900 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $250, but Koehl has agreed to maintain an average bank balance of $7,000 - this is her target cash balance. (Disregard cash in the till, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $150,000.
Now, suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this question are minimal.)
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,100 per month, and the rent is $2,900 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $250, but Koehl has agreed to maintain an average bank balance of $7,000 - this is her target cash balance. (Disregard cash in the till, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $150,000.
Sales Purchases December $160,000 $45,000 January 30,000 40,000 February 64,000 45,000 Prepare a cash budget for December, January, and February. I. Collections and Purchases: December January February Sales $ $ $ Purchases $ $ $ Payments $ $ $ II. Gain or Loss for Month: Receipts from sales $ $ $ Payments for: Purchases $ $ $ Salaries $ $ $ Rent $ $ $ Taxes $ --- --- Total payments $ $ $ Net cash gain (loss) $ $ $ III. Cash Surplus or Loan Requirements: Cash at start of month $ $ $ Cumulative cash $ $ $ Target cash balance $ $ $ Cumulative surplus cash or total loans to maintain $7,000 target cash balance $ $ $Now, suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this question are minimal.)
Explanation / Answer
Prepare a cash budget for December, January, and February. I. Collections and Purchases: December January February Sales 160000 30000 64000 Purchases 45000 40000 45000 Payments 19000 7000 7000 II. Gain or Loss for Month: Receipts from sales 160000 30000 64000 Purchases 45000 40000 45000 Salaries 4100 4100 4100 Rent 2900 2900 2900 Taxes 12000 --- --- Total payments 64000 47000 52000 Net cash gain (loss) 96000 -17000 12000 III. Cash Surplus or Loan Requirements: Cash at start of month 250 89250 65250 Cumulative cash 96250 72250 77250 Target cash balance 7000 7000 7000 Cumulative surplus cash or total loans to maintain $7,000 target cash balance 89250 65250 70250 Part - B Cash Receipts 0 Purchases 45000 Salaries 4100 Rent 2900 Taxes 12000 Loss -64000 Requirent at bank 7000 Loan 71000 Cash at hand 250 Laon Required 70750
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