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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 forecasts for the firm for parts of 2018 and 2019:
Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10 percent; collected the month following the sale, 75 percent; collected the second month following the sale, 15 percent. 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:
General and administrative salaries are approximately 27,000 dollars a month. Lease payments under long-term leases are 9,000 dollars a month. Depreciation charges are 36,000 dollars a month. Miscellaneous expenses are 2,700 dollars a month. Income tax payments of 63,000 dollars are due in September and December. A progress payment of 180,000 dollars on a new design studio must be paid in October. Cash on hand on July 1 will be 132,000 dollars, and a minimum cash balance of 90,000 dollars should be maintained throughout the cash budget period.
a. Prepare a monthly cash budget for the last 6 months of 2018.
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 all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.
The following selected transactions occurred during 2012 for Caspian Importers. The company ends its accounting year on April 30, 2012:
Feb 1. Loaned $14,000 cash to Brett Dowling on a one-year, 8% note. Apr 6. Sold goods to Putt Masters, receiving a 90-day, 6% note for$9,000. 30. Made a single entry to accrue interest revenue on both notes.
- Journalize all required entries from February 1 through April 30, 2012. Use a 360-day year for interest computations.