Question

Cash budget​) The Sharpe​ Corporation's projected sales for the first 8 months of 2016 are shown in the following​ table:

January	​$190,000	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, 30 percent is for​ cash, another 50 percent is collected in the month following the​ sales, and 20 percent is collected in the second month following sales. November and December sales for 2015 were $220,000 and $175,000 respectively. Sharpe purchases its raw materials 2 months in advance of its sales. The purchases are equal to 55 percent of the final sales price of​ Sharpe's products. The supplier is paid 1 month after it makes a delivery. For​ example, purchases for April sales are made in​ February, and payment is made in March. In​ addition, Sharpe pays $ 9,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $21,000 are made each​quarter, beginning in March. The​ company's cash balance on December​ 31, 2015, was $22,000. This is the minimum balance the firm wants to maintain. Any borrowing that is needed to maintain this minimum is paid off in the subsequent month if there is sufficient cash. Interest on​ short-term loans​ (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month.​ Thus, if in the month of April the firm expects to have a need for an additional​ $60,500, these funds would be borrowed at the beginning of April with interest of​ $605 (0.12times×​1/12times×​$60,500) owed for April and paid at the beginning of May.

a. Prepare a cash budget for Sharpe covering the first 7 months of 2016.

Fill in the Collections for the month of​ January:  ​(Round to the nearest​ dollar.)

	Nov	Dec	Jan	Feb	Mar	Apr	May	June	July
Sales	​$220,000	​$175,000	​$190,000	​$120,000	​$135,000	​$240,000	​$300,000	​$270,000	​$225,000
​Collections:
Month of sale ​(30​%)
First month ​(50​%)
Second month ​(20​%)
Total Collections			​

b. Sharpe has​ $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the​ notes?

Answer 1

Answer a)

	Nov	Dec	Jan	Feb	Mar	Apr	May	June	July
Sales	$220,000	$175,000	$190,000	$120,000	$135,000	$240,000	$300,000	$270,000	$225,000
​Collections:
Month of sale(30%)	$66,000	$52,500	$57,000	$36,000	$40,500	$72,000	$90,000	$81,000	$67,500
First month(50%)		$110,000	$87,500	$95,000	$60,000	$67,500	$120,000	$150,000	$135,000
Second month(20%)			$44,000	$35,000	$38,000	$24,000	$27,000	$48,000	$60,000
Total Collections	$66,000	$162,500	$188,500	$166,000	$138,500	$163,500	$237,000	$279,000	$262,500
​Expenditure:
Purchase(55% of next two month sales paid one month after purchase)	($96,250)	($104,500)	($66,000)	($74,250)	($132,000)	($165,000)	($148,500)	($123,750)	($82,500)
TAX payment					($21,000)			($21,000)
Interest on additional cash
Total Expenditure			($66,000)	($74,250)	($153,000)	($165,000)	($148,500)	($144,750)	($82,500)
Net Cash position			$122,500	$91,750	-$14,500	-$1,500	$88,500	$134,250	$180,000
Cash Balance			$22,000	$144,500	$236,250	$221,750	$220,250	$308,750	$443,000
Additional cash
Total cash balance		$22,000	$144,500	$236,250	$221,750	$220,250	$308,750	$443,000	$623,000

Answer b) As the company has $623,000 as net cash balance at end of July , Sharpe can pay back​ its $200,000 notes in the said month of July