The Sharpe Corporation\'s projected sales for the first eight months of 2011 are

Question

The Sharpe Corporation's projected sales for the first eight months of 2011 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 the sale, and 30 percent is collected in the second month following sale. November and December sales for 2010 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, 2010, 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 (i.e., .12 Times 1/12 Times $60,500) owed for April being paid at the beginning of May. Prepare a cash budget for Sharpe covering the first seven months of 2011. 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

a.Statement of cash budget

Notes

Statement showing collection from debtors

Statement showing payment for Raw material

b. No, sharpe doesn't have the ample cash to repay the notes since cash balance at the end of july is less than 200000 which is 191757.

Jan Feb Mar Apr May June July Opening Balance 22000 100000 107500 23500 15000 36889 127778 Collection from debtors 180000 118500 112500 141000 214500 279000 184590 Less: Payment for Raw material 72000 81000 144000 180000 162000 135000 90000 Less: Rent 10000 10000 10000 10000 10000 10000 10000 Less:Other expenditures 20000 20000 20000 20000 20000 20000 20000 Less: Tax prepayments 22500 22500 Add: Short term borrowings 61111 Less: Interest payments 611 611 611 611 Closing balance 100000 107500 23500 15000 36889 127778 191757

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