Capel Company\'s financial managers are meeting with the company\'s bank to rene

Question

Capel 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: Capel's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. . Capel's sales are made on credit with terms of 2/10, net 30. Capel'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 Capel's finished product. The purchases are generally made one month in advance of the sale, and Capel pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,320 million, then purchases during June would be $594 ($1,320 million x 0.45), and this amount would be paid in July. . Other cash expenses include wages and salaries at 18% of sales, monthly rent of $48 million, and other expenses at 5% of sales. Estimated tax payments of $70 million and $73 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,200 million payment for a new plant must be made in September. Assume that Capel's targeted cash balance is $300, and the estimated cash on hand on July 1 is $305.

Explanation / Answer

1) Credit purchase of July = 45% of next month sale      = 45% of 1212      = 545.4 2) Cash Reciepts - July 20% of this month sale (At 2% discount) (1200 x 20% x 98%) 235.2 70% of last month sale (1176 x 70%) 823.2 10% of last to last month sale (1140 x 10%) 114 Total cash reciepts 1172.4 3) Cash disbursment - October Credit sales - Last month purchase - 567 Wages salaries (18% of sales) (1260 x 18% 226.8 Rent 48 Other expenses (5% of 1260) 63 Tax 73 Plant construction 0 Total cash disbursement 977.8 September 4) Net Cash flow -878 Beginning balance 868 Ending cash balance -10 Target 300 Surplus(shortfall) (Ending balance - Target) -310 Please provide feedback…. Thanks in advance…. :-)

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