Problem 16-14
Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall andopened a new business, Koehl's Doll Shop. Business has been good,but Koehl frequently run out of cash. This has necessitated latepayment on certain orders, which is beginning to cause a problemwith suppliers. Koehl plans to borrow from the bank to have cashready as needed, but first she needs a forecast of how much sheshould borrow. Accordingly, she has asked you to prepare a cashbudget for the critical period around Christmas, when needs will beespecially high.
Sales are made on a cash basis only. Koehl's purchases must bepaid for during the following month. Koehl pays herself a salary of$5,000 per month, and the rent is $2,300 per month. In addition,she must make a tax payment of $12,000 in December. The currentcash on hand (on December 1) is $850, but Koehl has agreed tomaintain an average bank balance of $4,500 - this is her targetcash balance. (Disregard the amount in the cash register, which isinsignificant because Koehl keeps only a small amount on hand inorder to lessen the chances of robbery.)
The estimated sales and purchases for December, January, andFebruary are shown below. Purchases during November amounted to$110,000.
| Sales | Purchases |
| December | $120,000 | | $35,000 | |
| January | 42,000 | | 35,000 | |
| February | 62,000 | | 35,000 | |
- Prepare a cash budget for December, January, and February.
| I. Collections and Purchases: |
| | | |
| Sales | $ 120,00 | $ 42,000 | $ 62,000 |
| Purchases | $ 35,000 | $ 35,000 | $ 35,000 |
| Payments for purchases | $ 110,000 | $ 35,000 | $ 35,000 |
| Salaries | $ 5,000 | $ 5,000 | $ 5,000 |
| Rent | $ 2,300 | $ 2,300 | $ 2,300 |
| Taxes | $ 12,000Â Â | --------- | --------- |
| Total payments | $ 129,300 | $ 42,300 | $ 42,300 |
| Cash at start of forecast | $ 850 | ---------- | --------- |
| Net cash flow | $ -9,300 | $ -300 | $ 19,700 |
| Cumulative NCF | $ -8,450 | $ ______ | $ _____ |
| Target cash balance | $ 4,500 | $ 4,500 | $ 4,500 |
| Surplus cash or loans needed | $ -12,950 | $ ______ | $ ______ |
Please note: I have tried the below answers which areincorrect:
1) Cumulative NCF - For January -300 &February 19,700
Cumulative NCF - For January -13,250 &February 1,950
2) Surplus cash or loans needed - For January-4,800 & February 15,200
Surplus cash or loans needed - For January-17,750 & February 2,550
