Question

ZYX Corporation is preparing a cash budget for January of the coming year. The following data have been forecasted:

		January		February
Sales		750,000		800,000
Purchases		450,000		480,000
Operating expenses
Payroll		146,800		167,000
Advertising		52,700		62,800
Rent		8,750		8,750
Depreciation		23,750		23,750
End-of-December balances
Cash		120,000
Accounts payable		250,000
Bank loan		480,000

Sales are 40% cash. The term of credit sales is 2/10, n/30.

The collection pattern for credit sales is 75% in the month following the month of sale (of which 80% are collected within 10 days), and 23% in the month thereafter. The remaining credit sales are considered as uncollectible.

The accounts receivable balance on January 1 is $1,000,000, of which $ 700,000 represents uncollected December sales and $300,000 represents uncollected November sales.

Purchases are all on credit, with 40% paid in the month of purchase and the balance the following month.

Operating expenses are paid in the month incurred.

Starting from January, the firm desires to maintain a minimum cash balance of $150,000 at the end of each month. 6% APR loans are used to maintain the minimum cash balance.

At the end of each month, monthly interest is paid on the outstanding loan balance as of the beginning of the month. Repayments are made (at the end of the month) whenever the cash balance exceeds $150,000.

Required:

What is the amount of cash inflow from operations, what is the amount of cash outflow from operations, and what is the amount of loan balance at the end of January after loan repayments, if any?

Answer 1

Workings

Cash sales = 750000*40% = 300000

Credit sales = 450000

Balance of Account Receivable on Jan1

Uncollected December sales = 700000

Uncollected November sales = 300000

Total = 1000000

Amount Receivable in January

December sales = 700000*75% = 525000

November sales = 300000*23% = 69000

Total = 525000+69000= 594000

Payment made for purchases in January = 450000*40% =

180000

CASH BUDGET

1.Opening Balance 120000

2.cash inflow from operation

Cash sales 300000

Amount received From Account Receivable 594000

Total Cash Inflow 894000

3.Cash outflow from operations

Cash paid for purchases 180000

Cash paid for operating expenses

Payroll 146800

Advertising 52700

Rent 8750 208250

Paid to Account Payable 250000

Interest on Bank Loan[(480000*6%)÷12] 2400

Total cash outflow 640650

Net Balance (1+2-3) 373350

Repayment of loan (480000÷12) 40000

Cash balance at end of January 333350

Loan balance opening 480000

Repayment 40000

Loan balance at end 440000