Dorothy Koehl recently leased space in the Southside Mall and opened a new busin

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 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 for 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 lessen the chances of robbery.) The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.

December Sales $160,000 Purchases $40,000

January Sales $40,000 Purchases $40,000

February Sales $60,000 Purchases $40,000

a. Prepare a cash budget for December, January, and February.

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.)

Please show all calculations so I understand it better. Thank you.

Explanation / Answer

Note: Purchases are paid in the following month

b)

Note: As the sales are being made at 30 days credit, December sale will be collected in the following month. As Koehl,started selling in credit only on December, there will no collection from sale in December. (November sale was in cash and has been collected in the same month)

Cash Budget Particulars January February March Cash balance beginning 400 6000 6000 Cash receipt from sale 160000 40000 60000 Total cash available 160400 46000 66000 Cash disbursements: purchase 140000 40000 40000 Salary 4800 4800 4800 Payment of tax 12000 Rent 2000 2000 2000 Total disbursement 158800 46800 46800 Excess/ (deficiency) 1600 -800 19200 Financing Less closing balance 6000 6000 6000 Cash to be borrowed -4400 -6800 Loan repayment 13200

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