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 $4,200 per month, and the rent is $1,900 per month. In addition, she must make a tax payment of $14,000 in December. The current cash on hand (on December 1) is $250, 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	$120,000		$40,000
January	30,000		40,000
February	62,000		40,000

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)	$ 120,000		$ 30,000		$ 62,000
   Purchases	$ 40,000		$40,000		$ 40,000
   Payments for purchases	$ 160,000		$ 40,000		$ 40,000
   Salaries	$ 4,200		$ 4,200		$ 4,200
   Rent	$ 1,900		$ 1,900		$ 1,900
   Taxes	$ 140,000		---		---
   Total payments	$ 180,1000		$		$
   Cash at start of forecast	$		---		---
   Net cash flow	$		$		$
   Cumulative cash balance	$		$		$
   Target cash balance	$ 5,500		$ 5,500		$ 5,500
   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

a.	CASH BUDGET
	COLLECTIONS AND PURCHASES
		DECEMBER	JANUARY	FEBUARY
	A. SALES	120000	30000	62000
	PURCHASES	40000	40000	40000
	1. PAYMENT FOR PURCHASE	160000	40000	40000
	2. SALARIES	4200	4200	4200
	3. RENT	1900	1900	1900
	4. TAXES	14000
	B= 1+2+3+4 TOTAL PAYMENTS	180100	46100	46100
	C. CASH AT THE START OF FORECAST	250	5500	5500
	A-B NET CASH FLOW	-60100	-16100	15900
	CUMULATIVE NCF	-60350	-76450	-60550
	TARGET CASH BALANCE	5500	5500	5500
	SURPLUS CASH OR LOANS NEEDED	-65850	-81950	-66050
b.	DECEMBER
	A. SALES	0	NO SALES REALIZED IN DECEMBER
	PURCHASES	40000
	1. PAYMENT FOR PURCHASE	160000
	2. SALARIES	4200
	3. RENT	1900
	4. TAXES	14000
	B= 1+2+3+4 TOTAL PAYMENTS	180100
	C. CASH AT THE START OF FORECAST	250
	A-B NET CASH FLOW	-180100
	CUMULATIVE NCF	-180350
	TARGET CASH BALANCE	5500
	LOANS NEEDED	-185850