Dorothy Koehl recently leased space in the Southside Mall and opened a new busin
ID: 2807248 • Letter: D
Question
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high. Sales are made on a cash basis only. Koehl’s purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000—this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.) The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.
a. Prepare a cash budget for December, January, and February.
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl’s Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl’s purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000—this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.
sales purchases
December $160,000 $40,000
January $40,000 $40,000
Febuary $60,000 $40,000
a. Prepare a cash budget for December, January, and February.
b. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company’s loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
Explanation / Answer
Note
The amount is borrowed from bank which is in shortage of 6000
B.
Suppose Koehl starts aelling on a credit basis on December 1 giving customers 30 days to pay
If it is the case we need to know the sales for November also then we assume same as December
Closing Balance is 6000
Particulars December January February Opening Balance 400 6000 6000 Sales 160000 40000 60000 Total Cash Income(A) 160400 46000 66000 Less Purchases 140000 40000 40000 Salary 4800 4800 4800 Rent 2000 2000 2000 Tax Payment 12000 Total Cah outflow(B) 158800 46800 46800 Balance before borrowing 1600 -800 19200 Borrowed from Bank 4400 6800 0 Closing Balance 6000 6000 19200Related Questions
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