Concept explainers
a.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
Cash management:
Cash management refers to that arrangement in which the company manages the cash inflows and
a.
Explanation of Solution
Statement to show the surplus or deficit
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 20 | 20 | 20 | 20 |
Net |
5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.14 | 22.53 | ||
Income on short-term investment | 0.24 | 0.36 | ||
Short-term investments sold | 18.04 | |||
New short-term borrowings | 6.24 | |||
Less: Interest on short-term borrowings | 0.19 | 0.08 | ||
Short-term borrowing repaid | 3.45 | 0.279 | ||
Ending cash balance | 19.90 | 20 | 20 | 22.51 |
Minimum cash balance | 20 | 20 | 20 | 20 |
Cumulative Surplus/deficit | (0.10) | 2.51 | ||
Beginning short-term investments | 12 | 18.04 | ||
Ending short-term investments | 18.04 | 22.53 | ||
Beginning short-term debt | 0 | 0 | 6.24 | 2.79 |
Ending short-term debt | 0 | 6.24 | 2.79 | 0 |
Table (1)
Compute the net cash cost
The interest income in Quarter 1 is $0.24.
The interest income in Quarter 2 is $0.36.
The interest expense in Quarter 3 is $0.19.
The interest expense in Quarter 4 is $0.08.
Formula to compute the net cash cost:
Substitute $0.24 for interest earned in Quarter 1, $0.36 for interest earned in Quarter 2, $0.19 for interest expense in Quarter 3 and $0.08 for interest expense in Quarter 4,
Working Note:
Statement to show the computation of net cash inflows:
Particular |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning receivables | 34 | 52.50 | 45 | 61 |
Add: Sales | 105 | 90 | 122 | 140 |
Less: Collection of accounts | 86.5 | 97.50 | 106 | 131 |
Ending receivables | 52.5 | 45 | 61 | 70 |
Payment of accounts | 43.20 | 49.14 | 59.76 | 57.6 |
Add: Wages, taxes, and expenses | 31.5 | 27 | 36.6 | 42 |
Add: Capital expenditures | 40 | |||
Add: Interest and dividends | 6 | 6 | 6 | 6 |
Total cash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Total cash collections | 86.50 | 97.50 | 106 | 131 |
Total ash disbursements | 80.70 | 122.14 | 102.36 | 105.60 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Table (2)
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest expenditure in Quarter 3:
Compute the interest expenditure in Quarter 4:
Hence, the net cash cost is $0.33.
b.
To identify: The company would be able or not to boost the profit, if it changes the cash management policy.
b.
Explanation of Solution
Statement to show the surplus or deficit:
Particulars |
Quarter 1 (million $) |
Quarter 2 (million $) |
Quarter 3 (million $) |
Quarter 4 (million $) |
Beginning cash balance | 10 | 20 | 20 | 20 |
Net cash inflow | 5.80 | (24.64) | 3.64 | 25.40 |
Less: New short-term investments | 6.24 | 3.72 | 25.56 | |
Income on short-term investment | 0.44 | 0.56 | 0.08 | 0.16 |
Short-term investments sold | 24.08 | |||
New short-term borrowings | ||||
Less: Interest on short-term borrowings | ||||
Short-term borrowing repaid | ||||
Ending cash balance | 19.90 | 20 | 22.51 | |
Less: Minimum cash balance | 10 | 10 | 10 | 10 |
Cumulative Surplus/deficit | ||||
Beginning short-term investments | 22 | 28.247 | 4.16 | 7.89 |
Ending short-term investments | 28.24 | 4.16 | 7.89 | 33.6 |
Beginning short-term debt | 0 | 0 | 0 | 0 |
Ending short-term debt | 0 | 0 | 0 | 0 |
Table (3)
Compute the net cash cost
The interest income in Quarter 1 is $0.44.
The interest income in Quarter 2 is $0.56.
The interest income in Quarter 3 is $0.08.
The interest income in Quarter 4 is $0.16.
Formula to compute the net cash cost:
Substitute $0.44 for interest earned in Quarter 1, $0.56 for interest earned in Quarter 2, $0.08 for interest expense in Quarter 3 and $0.16 for interest expense in Quarter 4,
Working Note:
Compute the interest income in Quarter 1:
Compute the interest income in Quarter 2:
Compute the interest income in Quarter 3:
Compute the interest income in Quarter 4:
No, the company should not change the cash management policy as these policies give the more net cash cost and the company can consider any other factors but it is not necessary for it.
Company should not change its cash management policy as its net cash cost increases.
Want to see more full solutions like this?
Chapter 26 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
- Optimal Cash Transfer Barenbaum Industries projects that cash outlays of 4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firms marketable securities are invested to earn 12%, and the cost per transaction of converting securities to cash is 27. a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash. b. What will be Barenbaums average cash balance? c. How many transfers per year will be required? d. What will be Barenbaums total annual cost of maintaining cash balances? What would the total cost be if the company maintained an average cash balance of 50,000 or of 0 (it deposits funds daily to meet cash requirements)?arrow_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_forwardA firm's management wants to improve its cash flows with regard to working capital and wants to reflect this priority in its annual budget. What is an appropriate plan of action? O A. Stock up on inventory in order to never run out of stock B. Extend credit terms to customers in order to gain more sales O C. Pay all bills and payables when due D. Speeding up collection of accounts receivable from customersarrow_forward
- Which of the following about Cash Budgets is true? 1. Cash budgets are the financial statement that explains how the firm's cash changed over the previous year II. Cash budgets are usually created in daily, weekly, or monthly intervals III. Cash budget allow managers to evaluate changes in corporate policiesarrow_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_forwardCASH 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 declined, 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.arrow_forward
- Review 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_forwardCASH 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 Helens 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. 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 fundsthat 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 companys 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 firms ability to obtain bank credit? Explain. e. f. g. h.arrow_forwarde Home Help Cash conversion cycle American Products is concerned about managing cash efficiently. On the average, inventories have an age of 81 days, and accounts receivable are collected in 34 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $33 million. Cost of goods sold are $21 million, and purchases are $16 million. a. Calculate the firm's operating cycle. b. Calculate the firm's cash conversion cycle c. Calculate the amount of resources needed to support the firm's cash conversion cycle. d. Discuss how management might be able to reduce the cash conversion cycle. nments Plan a. American Products' operating eycle, OC, is days. (Round to the nearest whole number.) aits won alaxe ittinudia Liva ancial Calcailat thapter Resource Enter your answer in the ant yer box and then click Check Answer. Dynamic Study Modules Check Answer parts remaining Clear All OK Communication Tools > 2:34 PM 5/7/202 P Type here to search wwert 144arrow_forward
- Please revise question 46 to get an answer in this options An analyst has recently been hired to improve the performance of SL Energy Corporation, which has been experiencing a severe cash shortage. As one part of your analysis, the analyst wants to determine the firm’s cash conversion cycle. Using the following information and a 365-day year: Current inventory = $160,000; Annual sales = $1,095,000; Accounts receivable = $180,000; Accounts payable = $36,000; Total annual purchases = $730,000. Calculate the firm’s inventory conversion cycle. 18 days 70 days 75 days 80 days Based on information from Question 46~48, Calculate the firm’s cash conversion cycle (CCC). 122 days 129 days 147 days 128 daysarrow_forwardQuestion #2 Cash budgeting is critical to a company’s financial information needs. The following information was extracted from the records of A & B Manufacturing Company Limited. The opening cash balances on January 01, 2021 was expected to be $30,000. The budgeted sales were as follows: Budgeted Sales Month Year $November 2020 80,000December 2020 90,000January 2021 80,000February 2021 75,000March 2021 60,000April 2021 70,000 Analysis of records shows that debtors settle according to the following pattern: 70% within the month of sale 30% the following month Extracts of the purchases budget were as follows:Purchases budget Month Year $December 2020 65,000January 2021 50,000February 2021 75,000March 2021 70,000 …arrow_forwardQuestion #2 Cash budgeting is critical to a company’s financial information needs. The following information was extracted from the records of A & B Manufacturing Company Limited. The opening cash balances on January 01, 2021 was expected to be $30,000. The budgeted sales were as follows: Budgeted Sales Month Year $November 2020 80,000December 2020 90,000January 2021 80,000February 2021 75,000March 2021 60,000April 2021 70,000 Analysis of records shows that debtors settle according to the following pattern: 70% within the month of sale 30% the following month Extracts of the purchases budget were as follows:Purchases budget Month Year $December 2020 65,000January 2021 50,000February 2021 75,000March 2021 70,000 …arrow_forward
- Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781285065137Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
- Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning