Question

I. (25) Cash Budget for New Toys Company: Prepare a cash budget and provide advices for the second quarter of 201x based upon the following information: 

The firms’ sales during February and March of 201x were $1,528,000 and $1,662,000, respectively. Sales during the next four months are projected to be

: April $1,950,000 May $2,700,000 June $2,400,000 July $2,100,000 

Historically, 100% of the firm’s sales are on credit, with about 60% of each month’s sales collected one month after the sale and the remainder collected two months after the sale. 

New Toys purchases raw materials typically about 35% of sales one month ahead of sale. Purchases are generally paid 20% with cash, 50% in one month and the remaining 30% in two months after the purchase. 

The firm’s monthly wages, salaries and other fringe benefits including contributions to the firm’s 401-(k) plan are $100,000 (fixed) plus 25% of monthly sales. 

Marketing expenses are about 3% of each month’s sales and will be paid in the following month.

 Rent payments of $25,000 are due each month. 

Factory overhead which is $25,000 plus 2% of monthly sales are due each month.

 Estimated income taxes of $100,000 are due in June. 

The firm plans to purchase a new machine for $800,000 in April. 

Term loan (principal) of $1,000,000 is due in May (i.e., paying off the term loan). 

Interest rate on the term loan is 6.0% APR and interest payments are due each month. 

The firm owns a $350,000 CD and it matures in June. 

New Toys has a $2,000,000 evergreen line of credit with a bank at 3.6% APR and has $300,000 outstanding balance as of March 31. The firm pays off the balance whenever cash surplus is available, but it has to pay (monthly) interest on the outstanding balance one month later.

 At the end of March, the firm has $250,000 in cash. This is also the firm’s target monthly ending cash balance.

II. (5) Compute the 2016-4Q and 2017-1Q cash conversion cycles of Kimberly-Clark Corporation (KMB) AND Clorox Company (CLX).

Answer 1

Workings-

1.Cash receipts-

Collection condition 60% in next month and 40% in the second month

April = 60% of 1662000(March sale) + 40% of 1528000(Feb sale) =1608400

like wise for other month

2. purchase creditor-

Purchase amount =35% for sale purchased 1 month before sale

April payment=

Cash payment= 2700000*35%*20%=189000 only 20% paid incash

credit payments=

1950000*50%*35%=341250 being purchases of March paid after 1 month of puchase.

1662000*35%*20% =174510 being purchases of Feb paid after 2 month of purchase.

like wise for other months

3.

Salaries and wages

April= 100000+25% of 1950000=587500 likewise for other months

4.

Marketing expenses-

April -= 3% of March sales

like wise for oter months

5. Rent to be paid 25000 in each month

6. Factory overhead-

April=25000+ 2% of 1950000 =64000

like wise for other months

7.Interest rate on term loan

=1000000*6%/12=5000 every month

Term loan for May cannot be paid as the cash balance is overdrwan as the lne of credit is exhausted.

Overdrawing limit= 2000000-300000-378620-332706=988674.