Question

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 $4,100 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $11,000 in December. The current cash on hand (on December 1) is $300, but Koehl has agreed to maintain an average bank balance of $5,500 - 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 $160,000. Sales Purchases December $150,000 $30,000 January 32,000 30,000 February 56,000 30,000 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 $   $   $   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

a. Prepare a cash budget for December, January, and February.

Cash budget for Dec, Jan & Feb.

	December	January	February
Collections / sales (b)	$150,000	32,000	56,000
Payments: (a)
Purchase	$160,000	$30,000	$30,000
Rent	$2,000	$2,000	$2,000
Salary	$4,100	$4,100	$4,100
Tax	$11,000
Total payments (b)	$177100	$36,100	$36,100
Net cash (a-b)	($27,100)	($4,100)	$19,900
Cash surplus/ loan requirement:
Cash at the start of the month	$300	(26,800)	($30,900)
Cumulative cash	($26,800)	($30,900)	11,000
Cash target	(5,500)	(5,500)	(5,500)
Loan Requirement	(32,300)	(36400)	5,500

b). If the company began selling on credit on December 1, then it would have zero receipts during   December, down   from   $150,000.   Thus, it   would   have to   borrow   an   additional $150,000,   so   its   loans   outstanding   by   December 31   would   be   $182,300.   The   loan requirements would build gradually during the month.

	December
Collections / sales (b)	$0
Payments: (a)
Purchase	$160,000
Rent	$2,000
Salary	$4,100
Tax	$11,000
	$177,100
Net cash (a-b)	($177,100)
Cash surplus/ loan requirement:
Cash at the start of the month	$300
Cumulative cash	($176,800)
Cash target	(5,500)
Loan Requirement	(182,300)