16-14 Cash Budgeting--Challenging Problem Dorothy Koehl recently leased space in
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Question
16-14 Cash Budgeting--Challenging Problem
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 neccessitatied 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 how much she should 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 during the following month. Koehl pays herself a salary of $4,800 per month and the rent is $2,000 per month. In addition she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000--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 lesson the chances of robbery).
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.
Sales Purchases
December $160,000 $40,000
January $40,000 $40,000
February $60,000 $40,000
a. Prepare a cash budget for December, January and February---The answer is February Surplus = $2,000--Show all work and formulas to support answer.
b. Suppose that 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 part are minimal). The answer is $164,400. show all work and formulas to support answer.
Explanation / Answer
a. Cash Budget for December, January and February December January February Opening Cash Balance 400 6000 6000 Borrowings from Bank 4400 6800 Collections from Sales 160000 40000 60000 164800 52800 66000 Purchase Payments -140000 -40000 -40000 Salary -4800 -4800 -4800 Rentals -2000 -2000 -2000 Tax Dues -12000 Borrowings from Bank Repaid -11200 Closing Cash Balance 6000 6000 8000 The February Closing Cash Balance assuming that the bank borrowings are fully repaid is $ 8,000. Thus, February surplus cash over and above the average balance is $ 2,000 ($ 8,000 - $ 6,000). .b If the sales are made on credit, the borrowings from the bank for December would be increased by the amount of sales for the month viz. $ 160,000, thereby making it total $164,400.
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