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CASH BUDGETING Rework problem 15-10 using a spreadsheet model. After completing parts a through d, respond to the following: If Bowers’ customers began to pay late, collections would slow down, thus increasing the required loan amount. If sales dedined, this also would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.
15-10 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
May 2016 | $180,000 |
June | 180,000 |
July | 360,000 |
August | 540,000 |
September | 720,000 |
October | 360,000 |
November | 360,000 |
December | 90,000 |
January 2017 | 180,000 |
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:
May 2016 | $90,000 |
June | 90,000 |
July | 126,000 |
August | 882,000 |
September | 306,000 |
October | 234,000 |
November | 162,000 |
December | 90,000 |
General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are $9,000 a month. Depredation charges are $36,000 a month. Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 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.
- a. Prepare a monthly cash budget for the last 6 months of 2016.
- b. 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.
- c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 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.
- d. 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 ail financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.
- e.
- f.
- g.
- h.
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Chapter 15 Solutions
LMS Integrated for MindTap Finance, 1 term (6 months) Printed Access Card for Brigham/Houston's Fundamentals of Financial Management, Concise Edition, 9th
- ash Budgeting 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 $3,000 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $300, but Koehl has agreed to maintain an average bank balance of $7,000 - this is her target cash balance. (Disregard the amount in the cash register, which…arrow_forwardCash Budgeting 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 $4,900 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $600, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register,…arrow_forwardQUESTION 1 Which of the following statements is false about cash budgets? O Cash receipts are calculated by adding up all the cash inflows in a given month O When calculating the cash budget the firm must consider many aspects such as, cash receipts, cash expenses, minimum desired cash balance, and previous loans. O Cash receipts include sales, investment income and interest expenses. All of the above are true QUESTION 2 Based on the data below calculate the company's combined cost? Annual requirements = 7500 units Ordering cost = BD 12 Holding cost BD 0.5 O125 300 45000 150 0000arrow_forward
- The Chapter 8 Form worksheet is to be used to create your own worksheet version of the Review Problem in the text. Requirement 2: The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget: a. What are the total expected cash collections for the year under this revised budget? b. What is the total required production for the year under this revised budget? c. What is the total cost of raw materials to be purchased for the year under this revised budget? d. What are the total expected cash disbursements for raw materials for the year under this revised budget? e. After seeing this revised budget, the production manager cautioned that due to the current production constraint, a complex milling machine, the plant can produce no more than 90,000 units in any one quarter. Is this a potential problem?arrow_forwardQuestion 8 Which of the following is NOT true about a cash budget? A. A cash budget sets out all cash receipts and payments that a business expects to make over a period of time. B. Cash budgets are usually prepared on a month-to-month basis. C. Cash budgets show the expected bank balance at the end of the month. D. Cash budgets include personal cash receipts and expenses.arrow_forwardAssets Cash Minden Company Balance Sheet April 30 Accounts receivable Inventory Buildings and equipment, net of depreciation Total assets Liabilities and Stockholders' Equity Accounts payable Note payable Common stock Retained earnings Total liabilities and stockholders' equity $ 11, 100 72,500 37,500 238,000 $ 359,100 $ 68,000 19,400 180,000 91,700 $ 359,100 The company is in the process of preparing a budget for May and assembled the following data: a. Sales are budgeted at $255,000 for May. Of these sales, $76,500 will be for cash; the remainder will be credit sales. One-half of a month's credit sales are collected in the month the sales are made, and the remainder are collected in the following month. All of the April 30 accounts receivable will be collected in May. b. Purchases of inventory are expected to total $189,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following…arrow_forward
- Student Exercise 2: Cash Flow Budget The purpose of this exercise is provide hands-on learning in how to create a Cash Flow Forecast that predicts the month-end bank balance for every month of the year. In this scenario, you are the manager in a pharmaceutical company ABC. You are required to complete a cash flow forecast using the template provided. Your cash flow forecast will predict the bank balance at the end of each month for every month of the year The information you have at your disposal to complete this task is as follows: 1. The pharmacy has on its books four (4) major marketing events to run which will take place in March, May, August, and October. 2. The total of $285,000 of product sales will be earned in the months that the events are held. The March event will ean $65,000, and the other events in May, August and October will earn $70,000, 85,000 and $65,000 respectively. 3. Expenditure on casual salaries, travel and transport, and venue hire will occur only in the…arrow_forwardwhich one is correct please confirm? QUESTION 20 The first step in cash budget preparation is the ____________. a. estimation of the expected cash disbursements b. estimation of cash receipts c. scheduling of disbursements d. estimation of credit salesarrow_forwardSaved Which of the following statements Is false with respect to the sales budget Including a schedule of expected cash collections? Multiple Choice Estimating cash collections plays a role in preparing a cash budget. Although the estimated amounts of sales and cash collections may differ from one another on a month-to-month or quarterly basis, these two estimates must equal each other on an annual basis. Estimating sales ultimately impacts the estimated ending retained earnings on the balance sheet. Estimating cash collections also enables managers to estimate accounts receivable on the balance sheet. Noxtarrow_forward
- 7 In preparing a cash budget, what use is made of the number: cost of goods sold as a percentage of sales? Used to convert cost of goods sold numbers into inventory cost numbers to forecast cash collected from customers Used to convert loan borrowing amounts into loan repayment amounts to establish loan schedules Used to convert sales numbers into inventory cost numbers to forecast cash collected from customers O Used to convert sales numbers into inventory cost numbers to forecast cash paid for inventory purchasesarrow_forwardFriendly Bank is attempting to determine the cost behavior of its small business lending operations. One of the major activities is the application activity. Two possible activity drivers have been mentioned: application hours (number of hours to complete the application) and number of applications. The bank controller has accumulated the following data for the setup activity: Required: 1. Estimate a regression equation with application hours as the activity driver and the only independent variable. If the bank forecasts 2,600 application hours for the next month, what will be the budgeted application cost? 2. Estimate a regression equation with number of applications as the activity driver and the only independent variable. If the bank forecasts 80 applications for the next month, what will be the budgeted application cost? 3. Which of the two regression equations do you think does a better job of predicting application costs? Explain. 4. Run a multiple regression to determine the cost equation using both activity drivers. What are the budgeted application costs for 2,600 application hours and 80 applications?arrow_forwardReview the completed master budget and answer the following questions: Is Ranger Industries expecting to earn a profit during the next quarter? If so, how much? Does the company need to borrow cash during the quarter? Can it make any repayments? Explain. (Carefully review rows 74 through 80.)arrow_forward
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