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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 4-66 Cash Management

Hollis Corporation has the following budgeted schedule for expected cash receipts and cash disbursement.

Chapter 4, Problem 66.1C, Case 4-66 Cash Management Hollis Corporation has the following budgeted schedule for expected cash

Hollis begins July with a cash balance of $20,000, $15,000 of short-term debt, and no short-term investments. Hollis uses the following cash management policy:

  1. End-of-month cash should equal plus the excess of expected disbursements over receipts for the next month.
  2. If receipts are expected to exceed disbursements in the next month, the current month ending cash balance should be $20,000.
  3. Excess cash should be invested in short-term investments unless there is short-term debt, in which case excess cash should first be used to reduce the debt.
  4. Cash deficiencies are met first by selling short-term investments and second by incurring short-term debt.

Required:

Calculate the expected buying and selling of short-term investments and the in concurrence and repayment of short-term debt at the end Of July, August, and September.

To determine

Concept Introduction:

Budgets: Budgets are prepared to estimate the revenue, costs, receipts and payments for the business. There are several types of budgets prepared for a manufacturing concern. Few major types of budgets prepared by each manufacturing concert are as follows:

  • Sales budget
  • Cash Collection budget
  • Production budget
  • Raw material purchase budget
  • Expenses Budgets
  • Cash disbursement budget

To Calculate:

Expected buying and selling or short term investments and incurrence and repayment of short term debt at the end of July, August, and September.

Explanation

Expected buying and selling or short term investments and incurrence and repayment of short term debt at the end of July, August, and September are calculated as follows:

    Cash Budget
    MonthJuly August September October
    Beginning Cash Balance (A)20,000 20,000 20,000 40,000
    Expected Cash Receipts (B) 210,000 280,000 230,000 160,000
    Expected Cash Disbursements (C) 200,000 210,000 190,000 180,000
    Cash Balance (D) = A+B-C=30,000 90,000 60,000
    Required Ending Cash Balance (E)20,000 20,000 40,000
    (20000+180000-160000)
    Cash Surplus / (Deficit) (D-E)=10,000 70,000 20,000

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