Question

Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows:

	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Total cash receipts	$	280,000	$	430,000	$	310,000	$	330,000
Total cash disbursements	$	330,000	$	300,000	$	290,000	$	310,000

The company’s beginning cash balance for the upcoming fiscal year will be $40,000. The company requires a minimum cash balance of $10,000 and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.

Required:

Prepare the company’s cash budget for the upcoming fiscal year. (Repayments, and interest, should be indicated by a minus sign.)

Answer 1

Garden Depot Cash Budget
	Quarter 1	Quarter 2	Quarter 3	Quarter 4
Beginning Cash Balance	$            40,000	$     10,000	$   118,800	$   138,800
Total Cash Receipts	$          280,000	$   430,000	$   310,000	$   330,000
Total Cash Available	$          320,000	$   440,000	$   428,800	$   468,800
Less: Total Cash Disbursement	$          330,000	$   300,000	$   290,000	$   310,000
Excess (deficiency) of Cash Available over Disbursement	-$           10,000	$ 140,000	$ 138,800	$ 158,800
Financing:
Borrowings (at beginnings of quarters)	$            20,000	$                 -	$                 -	$                 -
Repayment (at end of quarters)	$                        -	-$     20,000	$                 -	$                 -
Interest	$                        -	-$       1,200	$                 -	$                 -
Total Financing	$            20,000	-$     21,200	$                 -	$                 -
Ending Cash Balance	$            10,000	$ 118,800	$ 138,800	$ 158,800

Borrowings required at the beginning of first quarter = Deficiency of cash available over disbursement + Targeted ending cash balance
=> $10,000 + $10,000 = $20,000

Interest expense = $20,000 x 3% x 2 = $1,200

Note: Since the interest is paid in second quarter, the interest expense has to be paid for 2 months.