Dorothy Koehl recently leased space in the Southside Mall and opened a new busin
ID: 2518667 • Letter: D
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 has frequently run 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 just how much she must 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 $4,300 per month, and the rent is $2,200 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $750, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard cash in the till, 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 $110,000.
Sales Purchases
December
$120,000-SALES
$40,000-PURCHASES
January
38,000-SALES
40,000-PURCHASES
February
68,000-SALES
40,000-PURCHASES
a.) Prepare a cash budget for December, January, and February.
December January February Sales Purchases Payments for purchases Salaries Rent Taxes Total payments Cash at start of forecast Net cash flow Cumulative NCF Target cash balance Surplus cash or loans 11250 $38,000 $40,000 $40,000 $4,300 $2,200 $68,000 $40,000 $40,000 $4,300 $2,200 $120,00 $40,000 $110,00 $4,300 $2,200 $10,000 $126,50 750 $-6500 $125750 $5500 $46,500 $46,500 $-8500 $79000 $5500 $-8500 $70500 $5500 neededExplanation / Answer
a)
CASH BUDGET
Particulars
Dec
Jan
Feb
Sales (a)
120000
38000
68000
Purchases (b)
40000
40000
40000
Payment for purchases (c)
110000
40000
40000
Salaries (d)
4300
4300
4300
Rent e
2200
2200
2200
Taxes (f)
10000
0
0
Total Payments(g) ( c+d+e+f)
126500
46500
46500
Cash at start of forecast (h)
750
0
0
Net cash flow (i) (a-g)
-6500
-8500
21500
Cumulative NCF (h+i)
-5750
-8500
21500
Target cash balance
5500
5500
5500
Surplus Cash or loans needed
-11250
-14000
16000
b)
CASH BUDGET
Particulars
Dec
Sales ( on credit basis)
120000
Purchases
40000
Payment for purchases
110000
Salaries
4300
Rent
2200
Taxes
10000
Total Payments
126500
Cash at start of forecast
750
Net cash flow
-126500
Cumulative NCF
(125750)
Target cash balance
5500
Surplus Cash or loans needed
-131250
CASH BUDGET
Particulars
Dec
Jan
Feb
Sales (a)
120000
38000
68000
Purchases (b)
40000
40000
40000
Payment for purchases (c)
110000
40000
40000
Salaries (d)
4300
4300
4300
Rent e
2200
2200
2200
Taxes (f)
10000
0
0
Total Payments(g) ( c+d+e+f)
126500
46500
46500
Cash at start of forecast (h)
750
0
0
Net cash flow (i) (a-g)
-6500
-8500
21500
Cumulative NCF (h+i)
-5750
-8500
21500
Target cash balance
5500
5500
5500
Surplus Cash or loans needed
-11250
-14000
16000
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