CASH BUDGETING Helen Bowers, owner of Helen\'s Fashion Designs, is planning to r
ID: 2780139 • Letter: C
Question
CASH BUDGETING
Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017:
Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:
General and administrative salaries are approximately $28,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,800 a month. Income tax payments of $64,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.
Prepare a monthly cash budget for the last 6 months of 2016. If no entry required, enter "0". Use minus sign to enter losses, loans outstanding or any other negative amounts.
Prepare monthly estimates of the required financing or excess funds - that is, the amount of money Bowers will need to borrow or will have available to invest. Round your answers to the nearest dollar. Enter loans outstanding with minus sign.
Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 or 1/31 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.
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Bowers' sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.
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Explanation / Answer
Cash Forecast May June July August September October November December January Collections and purchases worksheet Sales (gross) 1,86,000 1,86,000 3,72,000 5,40,000 7,20,000 3,60,000 3,60,000 90,000 1,80,000 Collections During month of sale-10% 18,600 18,600 37,200 54,000 72,000 36,000 36,000 9,000 18,000 During 1st month after sale- 75% of N-1 1,39,500 1,39,500 2,79,000 4,05,000 5,40,000 2,70,000 2,70,000 67,500 During 2nd month after sale- 15% of N-2 27,900 27,900 55,800 81,000 1,08,000 54,000 54,000 Total collections 2,04,600 3,60,900 5,32,800 6,57,000 4,14,000 3,33,000 1,39,500 Purchases Labor and raw materials 90,000 1,26,000 8,82,000 3,07,000 2,34,000 1,62,000 90,000 Payments for labor and raw materials-100% N+1 90,000 1,26,000 8,82,000 3,07,000 2,34,000 1,62,000 90,000 General and administrative salaries 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 28,000 Lease payments 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000 Miscellaneous expenses 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 Income tax payments 64,000 64,000 Design studio payment 1,80,000 Total payments 1,29,800 1,65,800 9,85,800 5,26,800 2,73,800 2,65,800 1,29,800 Net cash gain (loss) during month 74,800 1,95,100 (4,53,000) 1,30,200 1,40,200 67,200 9,700 Loan requirement or cash surplus Cash at start of month 1,32,000 2,06,800 4,01,900 (51,100) 79,100 2,19,300 2,86,500 Cumulative cash 2,06,800 4,01,900 (51,100) 79,100 2,19,300 2,86,500 2,96,200 Target cash balance 90,000 90,000 90,000 90,000 90,000 90,000 90,000 Cumulative surplus cash or loans outstanding to maintain $90,000 target cash balance 1,16,800 3,11,900 (1,41,100) (10,900) 1,29,300 1,96,500 2,06,200 Deposit/Loan Balanace to maintain 90000 July 1,16,800 August 3,11,900 September (1,41,100) October (10,900) November 1,29,300 December 1,96,500 If payments are made on 5th of the each month and collection will be received at the end of the day of the month, it means collections received during the month can't be utilised for payment, in that case collections can be considered for next month so that actual defecit/surplus situation can be known otherwise company will not be able to map its payment against collections In case of seasonal industry, Cash, Stock & Accouns Receviables are higher during the peak season as compare to during non-season period all these three items will increase the Current ratio and debt equity ratio
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