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 $14,000 in December. The current cash on hand (on December 1) is $450, but Koehl has agreed to maintain an average bank balance of $6,000 - 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 $150,000.

	Sales		Purchases
December	$170,000		$40,000
January	34,000		40,000
February	52,000		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)	$		$		$
   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

	1)	Statement of Cash Budget for the month of December, January & February
		Particulars	December	January	February
		Sales (Collections)	$          1,70,000	$                 34,000	$                 52,000
		Total Collections                                                                        (A)	$          1,70,000	$                 34,000	$                 52,000
		Purchases	$              40,000	$                 40,000	$                 40,000
		Payments
		Payments for Purchases	$          1,50,000	$                 40,000	$                 40,000
		Salaries	$                4,200	$                   4,200	$                   4,200
		Rent	$                2,000	$                   2,000	$                   2,000
		Taxes	$              14,000	$                          -	$                          -
		Total Payments                                                                            (B)	$          1,70,200	$                 46,200	$                 46,200
		Cash at Start of forecast (C)	$                    450	$                   6,000	$                   6,000
		Net Cash flow (A-B) = D	$                  -200	$               -12,200	$                   5,800
		Cummulative Cash Balance                                                 (C+D) = E	$                    250	$                  -6,200	$                 11,800
		Target Cash Balance                                                                     (F)	$                6,000	$                   6,000	$                   6,000
		Surplus cash or loans needed (F-E)	$                5,750	$                 12,200	$                 -5,800
	2)	Statement of Cash Budget for the month of December, January & February
		Particulars	December
		Sales during the month	$          1,70,000
		Purchases	$              40,000
		Collections
		Sales Collection                                                                         (A)	$                       -
		Payments
		Payments for Purchases	$          1,50,000
		Salaries	$                4,200
		Rent	$                2,000
		Taxes	$              14,000
		Total Payments                                                                            (B)	$          1,70,200
		Cash at Start of forecast (C)	$                    450
		Net Cash flow (A-B) = D	$        -1,70,200
		Cummulative Cash Balance                                                 (C+D) = E	$        -1,69,750
		Target Cash Balance                                                                     (F)	$                6,000
		Surplus cash or loans needed (F-E)	$          1,75,750
		Notes & Assumption:-
	1)	Till November Koehl made sales on a cash basis and from December onwards Koehl Starts selling on Credit Basis.
	2)	So, Koehl would receive the amount against credit sales for the month of December in the month of January.
	3)	Accordingly, Sales collections in the month of December would be Nil