4-6A (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows:
January $90,000 February $120,000
March $135,000 April $240,000
May $300,000 June $270,000
July $225,000 August $150,000
Of Sharpe’s sales, 10 percent is for cash, another 60 percent is
collected in the month following sales, and 30 percent is collected in
the second month following sales. November and December sales for 2003
were $220,000 and $175,000, respectively. Sharpe purchases its raw
material two months in advance of its sales equal to 60 percent of their
final sales price. The supplier is paid one month after it makes
delivery. For example, purchase for April sales are made in February and
payment is made in March. In addition, Sharpe pays $10,000 per month
for rent and $20,000 each month for other expenditures. Tax prepayments
of $22,500 are made each quarter, beginning in March. The company’s cash
balance at December 31, 2003, was $22,000; a minimum balance of $15,000
must be maintained at all times. Assume that any short-term financing
needed to maintain the cast balance is paid off in the month following
the month of financing if sufficient funds are available. Interest on
short-term loans (12 percent) is paid monthly. Borrowing to meet
estimated monthly cash needs takes place at the beginning of the month.
Thus, if he month of April the firm expects to have a need for
additional $60,500, these funds would be borrowed at the beginning of
April with interest of $605 (.12 x ½ x $60,500) owed for April and paid
at the beginning of May.
A. Prepare a cash budget for Sharpe covering the first seven months of 2004.
B. Sharpe has a $200,000 in notes payable due in July that must be
repaid or renegotiated for an extension. Will the firm have ample cash
to repay the notes?
Click here for the solution: The Sharpe Corporation’s projected sales for the first eight months of 2004 are as follows
