Wallace Company\'s financial managers are meeting with the company\'s bank to re
ID: 2798163 • Letter: W
Question
Wallace Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year The following budget assumptions were used to construct the budget: Wallace's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Wallace's sales are made on credit with terms of 2/10, net 30, Wallace's experience is that 20% is collected from customers who take advantage of the discount, 70% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. · · The cost of materials averages 45% of wallace's finished product. The purchases are generally made one month in advance of the sale, and Wallace pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $545 ($1,210 million x 0.45), and this amount would be paid in July Other cash expenses include wages and salaries at 17% of sales, monthly rent of $44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September .Assume that Wallace's targeted cash balance is $300, and the estimated cash on hand on July 1 is $295Explanation / Answer
Calculations are as follows:
Wallace company will be able to invest in short term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Wallace company will invest $628 million to the end of the year with a cash surplus of $628 million and a cash balance of $928 million. Wallace company will want a credit line of atleast $261 million to cover the month with the greatest shortfall and the financial manager can tell the bank to expect that they will be able to invest upto $628 million in the short term marketable securities.
Particulars May June July August September October November December Credit sales 1045 1078 1100 1111 1133 1155 1188 1210 Credit purchases 495 495 510 520 535 545 Particulars July August September October November December Cash receipts Collections from this month's sales 216 218 222 226 233 237 Collections from previous month's sales 755 770 778 793 809 832 Collections from sales two month's previously 105 108 110 111 113 116 Total cash receipts(1) 1076 1096 1110 1130 1155 1185 Cash disbursements Payments for credit purchases 495 500 510 520 535 545 Wages and salaries 187 189 193 196 202 206 Rent 44 44 44 44 44 44 Other expenses 55 56 57 58 59 61 Taxes 64 67 Payment for plant construction 1100 Total cash disbursements(2) 845 789 1904 885 840 856 Net cash flow(3)=(1)-(2) 231 307 -794 245 315 329 Beginning cash balance(4) 295 526 833 39 284 599 Ending cash balance(5)=(3)+(4) 526 833 39 284 599 928 Target cash balance(6) 300 300 300 300 300 300 Surplus(7)=(5)-(6) 226 533 -261 -16 299 628Related Questions
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