Question

(Cash budget) The Sharpe Corporation’s projected sales for the first 8 months of 2019 are shown in the corresponding 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, 10 percent is for cash, another 60 percent is collected in the month following the sales, and 30 percent is collected in the second month following sales. November and December sales for 2018 were $220,000 and $175,000, respectively.

Sharpe purchases its raw materials 2 months in advance of its sales. The purchases are equal to 60 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 $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter, beginning in March.

The company’s cash balance on December 31, 2018, 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(0.12×1/12×$60,500)$605(0.12×1/12×$60,500) owed for April and paid at the beginning of May.

1. Prepare a cash budget for Sharpe covering the first 7 months of 2019.

2. 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:

CASH BUDGET
DATA
January	190,000	10%	May	300,000
February	120,000	60%	June	270,000
March	135,000	30%	July	225,000
April	240,000		August	150,000
Purchases % of Sales	60%
Cash Budget
	Nov	Dec	Jan	Feb	Mar	Apr	May	June	July
	220,000	175,000	190,000	120,000	135,000	240,000	300,000	270,000	225,000
Collections:
Month of sales (10%)			19,000	12,000	13,500	24,000	30,000	27,000	22,500
First month (60%)			105,000	114,000	72,000	81,000	144,000	180,000	162,000
Second month (30%)			66,000	52,500	57,000	36,000	40,500	72,000	90,000
Total collections			190,000	178,500	142,500	141,000	214,500	279,000	274,500
Purchases	0	72,000	81,000	144,000	180,000	162,000	135,000	90,000
Payments		0	72,000	81,000	144,000	180,000	162,000	135,000	90,000
Cash Receipts			190,000	178,500	142,500	141,000	214,500	279,000	274,500
(collections)
Cash Disbursements
Purchases			72,000	81,000	144,000	180,000	162,000	135,000	90,000
Rent			10,000	10,000	10,000	10,000	10,000	10,000	10,000
Other expenditures			20,000	20,000	20,000	20,000	20,000	20,000	20,000
Tax Deposits					22,500			22,500
Interest on S-T					0	0	0	(550)	0
borrowing
Total Disbursements			102,000	111,000	196,500	210,000	192,000	186,950	120,000
Net Monthly Change			88,000	67,500	(54,000)	(69,000)	22,500	92,050	154,500
Beginning Cash Balance			22,000	110,000	177,500	123,500	54,500	22,000	169,050
Additional Financing					0	0	(55,000)	55,000	0
Needed (Repayment)
Ending Cash Balance			110,000	177,500	123,500	54,500	22,000	169,050	323,550
Cumulative Borrowing					0	0	(55,000)	0	0