Question
In: Accounting
You have recently been hired by Piepkorn Manufacturing to work in a newly established treasury department....
You have recently been hired by Piepkorn Manufacturing to work in a newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Gary Piepkon, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, all finance area needs work, and that’s what you’ve been brought in to do. The company currently has a cash balance of $305,000, and it plans to purchase new box-folding machinery in the fourth quarter at a cost of $525,000. The machinery will be purchased with cash because of a discount offered. The company’s policy is to maintain a minimum cash balance of $125,000. All sales and purchases are made on credit. Gary Piepkorn has projected the following gross sales for each of the next four quarters and the first quarter next year: Q1 Q2 Q3 Q4 Q1 (next year) Gross Sales $1,350,000 $1,410,000 $1,450,000 $1,530,000 $1,250,000 Piepkorn currently has an accounts receivable period of 53 days and an accounts receivable balance of $645,000. Twenty percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely this portion of the accounts receivable will never be collected. Piepkorn typically orders 60% of the next quarter’s projected gross sales in the current quarter, and suppliers are typically paid in 42 days. Wages, taxes, and other costs run about 30% of gross sales. The company has a quarterly interest payment of $135,000 on its long-term debt. Questions 1. Use the numbers given to complete the cash budget. 2. Rework the cash budget assuming Piepkorn changes to a minimum cash balance of $100,000. Q1 Q2 Q3 Q4 Total cash collections Total cash disbursements Net cash inflow Beginning Cash Balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit).
Questions
- Use the numbers given to complete the cash budget.
- Rework the cash budget assuming Piepkorn changes to a minimum cash balance of $100,000.
Solutions
Expert Solution
| Piepkorn Manufacturing | ||||
| Cash Budget | ||||
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Beginning balance(A) | 3,05,000.00 | 1,25,000.00 | 1,25,000.00 | 1,25,000.00 |
| Collections from accounts receivable(B)- W.N.1 | 5,16,000.00 | 13,50,000.00 | 14,10,000.00 | 14,50,000.00 |
| Total cash available(C=A+B) | 8,21,000.00 | 14,75,000.00 | 15,35,000.00 | 15,75,000.00 |
| Disbursements: | ||||
| Machinery purchased | - | - | - | 5,25,000.00 |
| Accounts payable | 8,10,000.00 | 8,46,000.00 | 8,70,000.00 | 9,18,000.00 |
| Working | Working Note.2 | |||
| Wages, taxes and other costs | 4,05,000.00 | 4,23,000.00 | 4,35,000.00 | 4,59,000.00 |
| Working | 13,50,000*30% | 14,10,000*30% | 14,50,000*30% | 15,30,000*30% |
| Interest on long term debt | 1,35,000.00 | 1,35,000.00 | 1,35,000.00 | 1,35,000.00 |
| Total disbursements(D) | 13,50,000.00 | 14,04,000.00 | 14,40,000.00 | 20,37,000.00 |
| Cash Deficit(E=C-D) | -5,29,000.00 | 71,000.00 | 95,000.00 | -4,62,000.00 |
| Minimum balance to be maintained | 1,25,000.00 | 1,25,000.00 | 1,25,000.00 | 1,25,000.00 |
| Total cash deficit is the cash deficit due to shortage of funds plus the minimum balance to be maintained | -6,54,000.00 | -54,000.00 | -30,000.00 | -5,87,000.00 |
| Note: We are facing cash deficit in every quarter. To cover the same and maintain minimum balance of $125000 short term loan can be availed. |
| Working Note 1 | ||||||
| Calculation of collections per quarter | ||||||
| Balance of account receivable at the beginning of the year | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | ||
| Sales | 6,45,000 | 13,50,000.00 | 14,10,000.00 | 14,50,000.00 | 15,30,000.00 | |
| Collection | 5,16,000.00 | 13,50,000.00 | 14,10,000.00 | 14,50,000.00 | ||
| Working | 20% of $645000 is bad debts and hence not receivable.Hence only the balance 80% will be received. | 1350000*100% | 1410000*100% | 1450000*100% | ||
| Note: We assume that the accounts receivable from sales in previous quarter is received within 53 days from the end of the quarter. | ||||||
| Working Note 2 | ||||||
| Calculation of accounts payable per month | ||||||
| Previous quarter | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Quarter 1 (Next year) | |
| Sales | Not known | $1,350,000 | $1,410,000 | $1,450,000 | $1,530,000 | $1250000 |
| Purchases in current quarter | 8,10,000.00 | 8,46,000.00 | 8,70,000.00 | 9,18,000.00 | 7,50,000.00 | |
| Working | 1350000*60% | 1410000*60% | 1450000*60% | 1530000*60% | 1250000*60% | |
| Payment to be made | 8,10,000.00 | 8,46,000.00 | 8,70,000.00 | 9,18,000.00 | ||
| Working | 810000*100% | 846000*100% | 870000*100% | 918000*100% | ||
| Note: We assume that the payment for accounts payable for purchases made in previous quarter is done within 42 days from the end of the quarter. |
| Rework if minimum balance to be maintained is $100000 | ||||
| Piepkorn Manufacturing | ||||
| Cash Budget | ||||
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Beginning balance(A) | 3,05,000.00 | 1,00,000.00 | 1,00,000.00 | 1,00,000.00 |
| Collections from accounts receivable(B)- W.N.1 | 5,16,000.00 | 13,50,000.00 | 14,10,000.00 | 14,50,000.00 |
| Total cash available(C=A+B) | 8,21,000.00 | 14,50,000.00 | 15,10,000.00 | 15,50,000.00 |
| Disbursements: | ||||
| Machinery purchased | - | - | - | 5,25,000.00 |
| Accounts payable | 8,10,000.00 | 8,46,000.00 | 8,70,000.00 | 9,18,000.00 |
| Working | Working Note.2 | |||
| Wages, taxes and other costs | 4,05,000.00 | 4,23,000.00 | 4,35,000.00 | 4,59,000.00 |
| Working | 13,50,000*30% | 14,10,000*30% | 14,50,000*30% | 15,30,000*30% |
| Interest on long term debt | 1,35,000.00 | 1,35,000.00 | 1,35,000.00 | 1,35,000.00 |
| Total disbursements(D) | 13,50,000.00 | 14,04,000.00 | 14,40,000.00 | 20,37,000.00 |
| Cash Deficit(E=C-D-100000) | -5,29,000.00 | 46,000.00 | 70,000.00 | -4,87,000.00 |
| Minimum balance to be maintained | 1,00,000.00 | 1,00,000.00 | 1,00,000.00 | 1,00,000.00 |
| Total cash deficit is the cash deficit due to shortage of funds plus the minimum balance to be maintained | -6,29,000.00 | -54,000.00 |
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