Options for the fill in the blank will_____(generate, Spend) $________(155m,124m

Question

Options for the fill in the blank will_____(generate, Spend) $________(155m,124m,1185m,45m) to end the year with a cash_______(balance, deficit) of $_______(45m,264m,196m,155m) and a cash______(surplus, shortfall) of $______( 218m,45m, 155m,196m) Jamison Company will want a credit line of at least $______(1,118m,1,382m,654m,639m) to cover the month with the greatest shortfall.....invest up to $______(218m,639m,1382m,264m) in short term marketable securities.

The following budget assumptions were used to construct the budget: Jamison's total sales for each month were first calculated in the sales budget and are reflected on the first ine of the cash budget. · Jamison's sales are made on credit with terms of 2/10, net 30, Jamison's experience is that 15% is collected from customers who take advantage of the discount, 75% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. · The cost of materials averages 55% of Jamison's finished product. The purchases are generally made one month in advance of the sale, and Jamison pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $666 ($1,210 million x 0.55), and this amount would be paid in July · Other cash expenses include wages and salaries at 18% of sales, monthly rent of$44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September Assume that Jamison's targeted cash balance is $200, and the estimated cash on hand on July 1 is $169 Use the preceding infommation to fill in the missing amounts in the following cash budget.

Explanation / Answer

2/10 net 30 means that if customers pay within 10 days, they will get a cash discount of 2%, otherwise the whole amount is payable within 30 days. So, 15% of the customers get this discount whereas 85% of the customers choose not to avail the disount.

(-)535

In the last six months of the year, Jamison will spend $124m (add all the net cash flows) to end the year with a cash balance of $45m and a cash shortfall of $155m. Jamison Company will want a credit line of at least $654m to cover the month (September) with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to $264m (biggest surplus) in short - term marketable securities.

Let me know in the comments if you have any doubts.

Cash Budget (in $ millions) Particulars July September October Credit Sales 1100 1133 1155 Credit Purchases (55% of sales of next month) 1133 x 0.55 = 623 1155 x 0.55 = 635 1188 x 0.55 = 653 Cash receipts Collections from this month's sales (15% of this months sales, also cash discount of 2%) 1100 x 15% x 0.98 = 162 1133 x 15% x 0.98 = 167 1155 x 15% x 0.98 = 170 Collections from previous month's sales (75% of previous months sales) 1078 x 75% = 808.5 or 809 1111 x 75% = 833 1133 x 75% = 850 Collections from sales two months previously 1045 x 10% = 105 1100 x 10% = 110 1111 x 10% = 111 Total Cash Receipts (A) 1076 1110 1131 Cash disbursements Payments for credit purchases (payment for purchases made in previous month) 605 623 635 Wages and Salaries (18% of sales) 1100 x 18% = 198 1133 x 18% = 204 1155 x 18% = 208 Rent 44 44 44 Other Expenses (5% of sales) 1100 x 5% = 55 1133 x 5% = 57 1155 x 5% = 58 Taxes 64 67 Payment for plant construction 1100 Total Cash disbursements (B) 966 2028 1012 Net Cash Flow (A - B) 110 (-)918 119 Beginning Cash Balance 169 464 (-)454 Ending Cash Balance 279 (-)454 (-)335 Target (minimum Cash balance) 200 200 200 Surplus (shortfall) cash 79 (-)654

(-)535

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