6. Cash budget Aa Aa Wallace Company\'s financial managers are meeting with the

Question

6. Cash budget Aa Aa 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 25% is collected from customers who take advantage of the discount, 65% 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 $1,320 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 20% 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 Wallace's targeted cash balance is $300, and the estimated cash on hand on July 1 is $280 Use the preceding information to fill in the missing amounts in the following cash budget.

Explanation / Answer

May June July August September October November December Credit sales 1140 1176 1200 1212 1236 1260 1296 1320 Credit purchases 529 540 545 556 567 583 594 July August September October November December Cash receipts: Collections from this month's sales (24.5%) 294 297 303 309 318 323 Collections from previous month's sales (65%) 764 780 788 803 819 842 Collections from sales 2 months previously (10%) 114 118 120 121 124 126 Total cash receipts 1172 1195 1211 1233 1261 1291 Cash disbursements: Payments for credit purchases 540 545 556 567 583 594 Wages and salaries 240 242 247 252 259 264 Rent 48 48 48 48 48 48 Other expenses 60 61 62 63 65 66 Taxes 70 73 Payment for plant construction 1200 Total cash disbursements 958 896 2113 1003 955 972 Net cash flow 214 299 -902 230 306 319 (Receipts-Disbursements) Beginning cash balance 280 494 793 -109 121 427 Ending cash balance 494 793 -109 121 427 746 Target (minimum) cash balance 300 300 300 300 300 300 Surplus (shortfall) cash 194 493 -409 -179 127 446 Hansborough company……………………….cash requirements in others. In the last six months of the year, Hansborough will borrow $409 millions to end the year with a cash balance of $746 millions and a cash surplus of $446 million. Hansborough company……………………….of atleast $409 million to cover the month with the greatest shortfall and the financial managers can tell…………………………………invest upto $493 million in short term marketable securities.

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