1. Transcript Company is preparing a cash budget for February. The company expec

Question

1.

Transcript Company is preparing a cash budget for February. The company expects to have $150,000 cash at the beginning of February and anticipates total February sales of $800,000, consisting of 25% cash sales and 75% bank credit card sales. The bank charges 3 percent for credit card transactions. The company sets its selling price at 160 percent of the cost of purchases and pays for each month's purchases at the end of the month. Other cash disbursements are $20,000 per month plus 4% of total sales. In addition, a $600,000 note will be due in February for equipment purchased last August. Transcript Company has an agreement with its bank to maintain a cash balance of $100,000.

Required:

What amount, if any, must the company borrow during February?

Explanation / Answer

Cash Sales = 25% of $800,000 = $200,000

Credit Card Sales = 75% of $800,000 = $600,000

Bank Charges = 3% of Credit Card Sales = 3% of $600,000 = $18,000

Selling price = 160% of Cost of purchases

So, Cost of purchases = Selling price / 160% = $800,000 / 160% = $500,000

4% of Sales = 4% of $800,000 = $32,000

So, the company should borrow $320,000 during february.

Particulars Amount Amount Opening cash 150000 Add: Cash Sales 200000 Add: Card Sales 600000 Less: Card Charges 18000 Less: Purchases 500000 Less: other disbursements 20000 Less: Other disbursements 2 32000 Less: Note Due 600000 Less: Closing balance 100000 -470000 Borrowing 320000

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