Precision Machines is preparing a financial plan for the next six months to dete

Question

Precision Machines is preparing a financial plan for the next six months to determine the financial needs of the company. The historical analysis of the company’s sales shows that the company’s total sales are 30% cash sales and 70% credit sales. Further analysis of credit sales shows that the company receives 50% of the credit sales one month after the sale and the remaining 50% in the second month after the sale. This means the cash collections from sales are 30% in the first month of the sale, 35% in the second month, and 35% in the third month. The materials purchased by the company amounts to 50% of the sales for the month. The company pays for the purchases one month after the initial purchase. The company likes to maintain a cash balance of $5,000. The cost of borrowing is 10%. The company plans to pay off the loan whenever there is a surplus and borrow when there is a deficit. The attached spreadsheet shows revenues (sales), expenses, capital expenditures, and other expenses for Precision Machines’ next six months. Using the information given on the spreadsheet, prepare a cash budget for January through June and determine the cash surplus, deficit, and the financing needs of the company.

Annual Cost of borrowing 10.00%

Minimum Cash Balance $5,000.00

Beginning Cash Balance $7,500.00 Revenues (Sales)

NOV$40,000.00 DEC$50,000.00 JAN$48,000.00 FEB$55,000.00 MARCH $35,000.00 APRIL$50,000.00 MAY$65,000.00 JUNE$40,000.00

Cash Collections

First Month (30%)

Second Month (35%)

Third Month (35%)

Total Collections

Cash Disbursements

Material Purchases Salaries JAN 6,000.00 FEB 6,000.00 MARCH 6,000.00 APRIL 6,000.00 MAY 6,000.00 JUNE 6,000.00

Wages JAN 3,000.00 FEB 3,500.00 MARCH 3,000.00 APRIL 3,200.00 MAY 3,500.00 JUNE 3,000.00

Other Expenses

Capital Expenditure MARCH 45,000.00

Dividends MARCH 1,000.00 JUNE 1,000.00

Interest Total Disbursements

Cash flows

Net cash flows

Cumulative cash flows

Minimum Cash Balance

Cash Surplus or (Deficit) Recommendations:

Explanation / Answer

Answer to the Question

CASH BUDGET JAN FEB MARCH APRIL MAY JUNE Total Opening Cash          7,500       19,400         36,700           5,000         20,515       35,265          7,500 Collection During the month ( Refer Working note below)        45,900       50,800         46,550         46,500         49,250       52,250      291,250 Payment Payment for purchase        25,000       24,000         27,500         17,500         25,000       32,500      151,500 Salaries paid          6,000        6,000           6,000           6,000           6,000         6,000        36,000 Wages Payment          3,000        3,500           3,000           3,200           3,500         3,000        19,200 Capital expenditures               -               -           45,000        45,000 Dividend paid               -               -             1,000         1,000          2,000 Loan taken               -               -             4,250          4,250 Loan Repaid           4,250          4,250 Interest on Loan 0N 5,250 @10% FOR 1 Month               -               -                 35              35 Closing Cash Balance        19,400       36,700           5,000         20,515         35,265       45,015        45,015

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