Question

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecast sales figures:

Actual			Forecast			Additional Information
November	$440,000		January	$520,000		April forecast	$460,000
December	460,000		February	560,000
			March	470,000

Of the firm’s sales, 50 percent are for cash and the remaining 50 percent are on credit. Of credit sales, 50 percent are paid in the month after sale and 50 percent are paid in the second month after the sale. Materials cost 35 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 50 percent of sales and is paid for in the month of sales. Selling and administrative expense is 5 percent of sales and is paid in the month of sales. Overhead expense is $25,000 in cash per month.

Depreciation expense is $11,200 per month. Taxes of $9,200 will be paid in January, and dividends of $8,000 will be paid in March. Cash at the beginning of January is $104,000, and the minimum desired cash balance is $99,000.

a. Prepare a schedule of monthly cash receipts for January, February, and March.
  

b. Prepare a schedule of monthly cash payments for January, February, and March.
  

c. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

  

Answer 1

1.

Cash Receipts
	January	February	March	Total
Current Month Sales 50%	$          2,60,000	$          2,80,000	$          2,35,000	$           7,75,000
Prior month sales 50%	$          2,30,000	$          2,60,000	$          2,80,000	$           7,70,000
Total Cash Receipts	$         4,90,000	$         5,40,000	$          5,15,000	$         15,45,000

2.

	January	February	March	Total
Purchases	$          1,96,000	$          1,64,500	$          1,61,000
Payments for Purchases
Following Month	$          1,82,000	$          1,96,000	$          1,64,500	$           5,42,500
Direct Labor	$          2,60,000	$          2,80,000	$          2,35,000	$           7,75,000
Selling and administrative expenses	$             26,000	$             28,000	$              23,500	$               77,500
Overhead expense	$             25,000	$             25,000	$              25,000	$               75,000
Payments	$         4,93,000	$         5,29,000	$          4,48,000	$         14,70,000

3.

Cash Budget
	January	February	March	Total
Beginning Balance	$          1,02,000	$             99,000	$          1,10,000	$           1,02,000
Cash Collections	$          4,90,000	$          5,40,000	$          5,15,000	$         15,45,000
Total Cash Available	$          5,92,000	$          6,39,000	$          6,25,000	$         16,47,000
Cash Disbursements
Monthly Payments	$          4,93,000	$          5,29,000	$          4,48,000	$         14,70,000
Taxes Paid	$               9,200			$                 9,200
Dividend Paid			$                8,000	$                 8,000
Total Cash Disbursements	$          5,02,200	$          5,29,000	$          4,56,000	$         14,87,200
Preliminary Ending Balance	$             89,800	$          1,10,000	$          1,69,000	$           1,59,800
Financing
Borrowings	$               9,200	$                      -		$                 9,200
Repayment			$              -9,200	$               -9,200
Interest			$                      -	$                       -
Total Financing	$               9,200	$                      -	$              -9,200	$                       -
Ending Balance	$             99,000	$          1,10,000	$          1,59,800	$           1,59,800

Repayment of $9200 may not be recorded. You may choose to ignore that, i have assumed it is repaid at end of quarter, alternatively $9200 can also be repaid in Februrary