4-6A. (Cash budget) The Sharpe Corporation’s projected sales for the first eight

Question

4-6A. (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004
are as follows:
January $ 90,000 May $300,000
February 120,000 June 270,000
March 135,000 July 225,000
April 240,000 August 150,000

Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following sale, and 30 percent is collected in the second month following sale. November and December sales for 2003 were $220,000 and $175,000, respectively.
Sharpe purchases its raw materials two months in advance of its sales equal to 60 percent of their final sales price.
The supplier is paid one month after it makes delivery. For example, purchases
for April sales are made in February and payment is made in March.
In addition, Sharpe pays $10,000 per month for rent and $20,000 each month for other expenditures.
Tax prepayments of $22,500 are made each quarter, beginning in March.
The company’s cash balance at December 31, 2003, was $22,000; a minimum balance of $15,000 must be maintained at all times. Assume that any short-term financing needed to maintain the cash balance is paid off in the month following the month of financing if sufficient funds are available.

Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.

a. Prepare a cash budget for Sharpe covering the first seven months of 2004.
b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for
an extension. Will the firm have ample cash to repay the notes?

Explanation / Answer

The Sharpe Corporation
Cash Budget
                       Nov.      Dec       Jan        Feb       Mar        Apr      May       June       Jul         Aug
Sales            220,000 175,000 90,000  120,000 135,000  240,000 300,000 270,000 225,000 150,000
____________________________________________________________________________________________
Cash Sales(10%)                             9,000    12,000   13,500    24,000    30,000   27,000    22,500  
1st Month(60%)                          105,000    54,000   72,000    81,000 144,000 180,000  162,000
2nd Month(30%)                           66,000    52,500   27,000   36,000    40,500   72,000    90,000                 
Total Collections                        180,000   118,500 112,500  141,000   214,500 279,000 274,500               
Purchase                         72,000 81,000   144,000 180,000 162,000   135,000   90,000
_____________________________________________________________________________________________
Cash Disbursement
Purchases (1 month )                   72,000    81,000  144,000   180,000   162,000 135,000    90,000
Rent                                           10,000    10,000    10,000     10,000    10,000    10,000    10,000
Other Expenditure                      20,000    20,000    20,000     20,000    20,000    20,000    20,000
Tax Prepayments                                                   22,500                                 22,500   
Intt. on s/term borrow.                      0             0           0             0          605        386            0
Total Disbursement                   102,000    111,000 196,500   210,000   192,605   187,886   120,000
Net Monthly Change                    78,000        7,500 (84,000) (69,000)   21,895     91,114   154,500
Begining Cash Balance                22,000     100,000 107,500    23,500     15,000     15,000    67,509
Addl. Finace(Repayments)                 0               0           0     60,500   (21,895)   (38,605)           0
Ending Cash Balance                 100,000     107,500    23500     15,000     15,000     67,509   222,009
_________________________________________________________________________________________
b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?

Yes Sharpe has sufficient fund to repay notes in the month of July. As per their estimates, if virtually met with, the company will have $222,009.

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