Question

Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs 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 how much she should 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 $4,200 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $4,500 - this is her target cash balance. (Disregard the amount in the cash register, 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 $110,000.

	Sales		Purchases
December	$180,000		$25,000
January	36,000		25,000
February	50,000		25,000

1. Prepare a cash budget for December, January, and February. Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

   Collections and Purchases:
   	December		January		February
   Sales (Collections)	$		$		$
   Purchases	$		$		$
   Payments for purchases	$		$		$
   Salaries	$		$		$
   Rent	$		$		$
   Taxes	$		---		---
   Total payments	$		$		$
   Cash at start of forecast	$		---		---
   Net cash flow	$		$		$
   Cumulative cash balance	$		$		$
   Target cash balance	$		$		$
   Surplus cash or loans needed	$		$		$

2. Suppose that 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 part are minimal.) Do not round intermediate calculations. Round your answer to the nearest dollar.

   $  

Answer 1

CASH BUDGET FOR DECEMBER, JANUARY AND FEBRUARY
	December	January	February
Sales (Collections) (This is under cash basis )	$180,000	$  36000	$  50000
Purchases ( indicative figure only not taken for budget)	$    25000	$  25000	$  25000
Payments for purchases	$  110000	$  25000	$  25000
Salaries	$     4200	$   4200	$   4200
Rent	$      2000	$   2000	$   2000
Taxes	$    10000	---	---
Total payments	$  126200	$  31200	$  31200
Cash at start of forecast	$       850	$ 54650	$  59450
Net cash flow	$   53800	$    4800	$  18800
Cumulative cash balance	$   54650	$  59450	$  78250
Target cash balance	$     4500	$    4500	$    4500
Surplus cash or loans needed	$   50150	$  54950	$  73750
CASH BUDGET FOR DECEMBER, JANUARY AND FEBRUARY (At 30 days credit on sale)
	December	January	February
Sales ( sales under 30 days credit basis)	$180,000	$  36000	$  50000
Purchases ( indicative figure only not taken for budget)	$    25000	$  25000	$  25000
The above figures are only indicative
BUDGET
Sales (Collections, sales under 30 days credit basis)	---	$180,000	$  36000
Payments for purchases	$  110000	$  25000	$  25000
Salaries	$     4200	$   4200	$   4200
Rent	$      2000	$   2000	$   2000
Taxes	$    10000	---	---
Total payments	$  126200	$  31200	$  31200
Cash at start of forecast	$       850	$    4500	$  153300
Net cash flow	$ -126200	$ 148800	$  4800
Cumulative cash balance	$-125350	$ 153300	$ 158100
Target cash balance	$     4500	$    4500	$    4500
Surplus cash (+) or loans needed (-)	$-120850	$  148800	$ 153600