Solution 11/26/2018
Chapter: 16
Problem: 18
Input Data
Collections during month of sale 15%
Collections during month after sale 65%
Collections during second month after sale 20%
Lease payments $5,000
Target cash balance $40,000
General and administrative salaries $15,000
Depreciation charges $7,500
Income tax payments (Sep & Dec) $25,000
Miscellaneous expenses $2,000
New office suite payment (Oct) $80,000
Cash on hand July 1 $60,000
Sales, labor, and RM adjustment factor 0%
Rusty Spears, CEO of Rusty’s Renovations, a custom building and repair company, is preparing documentation for
a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for
parts for the next two years.
Estimates obtained from the credit and collection department are as follows: collections within the month of sale,
15%; collections during the month following the sale, 65%; collections the second month following the sale, 20%.
Payments for labor and raw materials are typically made during the month following the one in which these costs
were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table.
General and administrative salaries will amount to approximately $15,000 a month; lease payments under long-term
lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will
be $2,000 a month; income tax payments of $25,000 will be due in both September and December; and a progress
payment of $80,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $60,000,
and a minimum cash balance of $40,000 will be maintained throughout the cash budget period.
Note: When the percent collected during
the second month after sale is changed,
the percent for collections during month
after sale is automatically changed so that
100% of sales are collected during the
three-month period.
a. Prepare a monthly cash budget for the last six months of the year.
May June July August September October November December January
Original sales estimates $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000
Original labor and raw mat. estimates $75,000 $90,000 $95,000 $70,000 $60,000 $50,000 $20,000 $20,000
Forecasted Sales
Sales (gross) $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000
Collections
During month of sale 19500 18000 15000 12000 9000 6000
During 1st month after sale 65000 84500 78000 65000 52000 39000
During 2nd month after sale 12000 20000 26000 24000 20000 16000
Total collections $96,500 $122,500 $119,000 $101,000 $81,000 $61,000
Purchases
Labor and raw materials $75,000 $90,000 $95,000 $70,000 $60,000 $50,000 $20,000 $20,000
Payments for labor and raw materials $90,000 $95,000 $70,000 $60,000 $50,000 $20,000
Payments
Payments for labor and raw materials 90,000 95,000 70,000 60,000 50,000 20,000
General and administrative salaries 15,000 15,000 15,000 15,000 15,000 15,000
Lease payments 5,000 5,000 5,000 5,000 5,000 5,000
Miscellaneous expenses 2,000 2,000 2,000 2,000 2,000 2,000
Income tax payments 25,000 25,000
Design studio payment 80,000
Total payments $112,000 $117,000 $117,000 $162,000 $72,000 $67,000
Net Cash Flows
Cash on hand at start of forecast period $60,000
Net cash flow (NCF): Total collections – Total payments ($15,500) $5,500 $2,000 ($61,000) $9,000 ($6,000)
Cumulative NCF: Prior month cumulative + this month's NCF $44,500 $50,000 $52,000 ($9,000) ($0) ($6,000)
Cash Surplus (or Loan Requirement)
Target cash balance $40,000 $40,000 $40,000 $40,000 $40,000 $40,000
Surplus cash or loan needed: Cum NCF – Target cash $4,500 $10,000 $12,000 ($49,000) ($40,000) ($46,000)
Max. Loan $49,000
b. How much must Spears borrow each month to maintain the target cash balance?
Answer. Look at the "Surplus cash or loan needed" line at the bottom of the cash budget.
c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunched
early in the month?
Answer: Just before the busy season, the company would have some current assets, but not very much, and it
-25% $ 95,000 $ 95,000 $ 95,000 $ 95,000 $ 95,000 $ 96,500 $ 101,000
0% $ 46,000 $ 49,000 $ 53,000 $ 59,000 $ 65,000 $ 71,000 $ 77,000
25% $ 8,000 $ 18,000 $ 23,000 $ 30,500 $ 38,000 $ 45,500 $ 53,000
50% -$ 19,750 -$ 7,750 -$ 1,750 $ 7,250 $ 16,250 $ 30,750 $ 46,500
75% -$ 23,375 -$ 9,375 -$ 2,375 $ 8,125 $ 18,625 $ 31,875 $ 50,250