Pro Forma Income Statement and Balance Sheet Cash is king! Although this is often an overused statement, it is definitely true that a business cannot function effectively without strong cash inflows.
Pro Forma Income Statement and Balance Sheet Cash is king! Although this is often an overused statement, it is definitely true that a business cannot function effectively without strong cash inflows. The cash budget helps managers spot problem areas involving cash flow throughout the year. It also allows these managers to develop proactive solutions.
To help you gain the necessary skills to complete this week’s problem, you have been provided with a problem demonstration dealing with the cash budget.
It is suggested that you view this problem demonstration before attempting to do this week’s homework. Enjoy the demonstration!
Transcript
Scenario: Cash Budget
The McClain Corp. is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $ 75,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Because McClain Corp has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company to prepare a cash budget for the third quarter.
The following data has been gathered by the staff.
On July 1, 20X9, the beginning of the third quarter, the company will have a cash balance of $ 51,000.
Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account).
Month
Amount in Dollars ($)
May (actual)
410,000
June (actual)
380,000
July (budgeted)
440,000
August (budgeted)
470,000
September (budgeted)
420,000
Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following the sale, and 2% in the second month following the sale. The remainder is uncollectible.
Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below
July
August
September
Purchases (Merchandise)
$180,000
$175,000
$165,000
Salaries
$85,000
$85,000
$75,000
Advertising
$100,000
$110,000
$120,000
Rent Payments
$35,000
$35,000
$35,000
Depreciation
$45,000
$45,000
$45,000
Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $165,000.
The company will purchase equipment for the month of July, which is expected to cost $20,000, and it will be paid during the month of July.
In preparing the cash budget, assume that the $75,000 loan will be made in July and repaid in September. Interest on the loan will be $3,500.
Assignment Details
Important!
It is expected that the assignment will be completed using an Excel spreadsheet using formulas.
Prepare a schedule of expected cash receipts (collections) for July, August, and September and for the quarter in total.
Prepare a cash budget, by month and in total, for third quarter (July through September).
If the company needs a minimum cash balance of $25,000 to start each month, can the loan be repaid as planned? Please explain.
Submit your Excel spreadsheet with its formulas to the Week 5 Homework Submission page.
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