Question

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 just how much she must 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 $4,300 per month, and the rent is $2,200 per month. In addition, she must make a tax payment of $13,000 in December. The current cash on hand (on December 1) is $200, but Koehl has agreed to maintain an average bank balance of $5,500 - 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 $130,000.

	Sales		Purchases
December	$170,000		$25,000
January	32,000		25,000
February	70,000		25,000

a.Prepare a cash budget for December, January, and February. Use a minus sign to enter negative values for net cash flows, cumulative NCF values, and loans needed, if any. If the answer is zero, enter "0". Do not round intermediate calculations. Round your answers to the nearest dollar.

Collections and Purchases:
	December	January	February
Sales
Purchases
Payments for purchases
Salaries
Rent
Taxes
Total payments
Cash at start of forecast
Net cash flow
Cumulative NCF
Target cash balance
Surplus cash or loans needed

b.Suppose 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 question are minimal.) Use a minus sign to enter a negative value for loan requirements. Do not round intermediate calculations. Round your answer to the nearest dollar.

Answer 1

a.
	Collections and Purchases:
		December	January	February
	Sales	170,000	32,000	70,000
	Purchases:	25,000	25,000	25,000
	Payments for purchases	130,000	25,000	25,000
	Salaries	4,300	4,300	4,300
	Rent	2,200	2,200	2,200
	Taxes	13,000	-	-
	Total payments	149,500	31,500	31,500
	Cash at start of forecast	200	20,700	21,200
	Net cash flow	20,500	500	38,500
	Cumulative NCF	20,700	21,200	59,700
	Target cash balance	5,500	5,500	5,500
	Surplus cash or loans needed	15,200	15,700	54,200
b.	Collections and Purchases:
		December
	Sales	-
	Purchases:	25,000
	Payments for purchases	130,000
	Salaries	4,300
	Rent	2,200
	Taxes	13,000
	Total payments	149,500
	Cash at start of forecast	200
	Net cash flow	(149,500)
	Cumulative NCF	(149,300)
	Target cash balance	5,500
	Surplus cash or loans needed	(154,800)