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    Cash Budget

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    4-6A. (Cash budget) The Sharpe Corporation's projected sales for the first eight months of 2004
    are as follows:
    January $ 90,000 May $300,000
    February 120,000 June 270,000
    March 135,000 July 225,000
    April 240,000 August 150,000

    Of Sharpe's sales, 10 percent is for cash, another 60 percent is collected in the month following
    sale, and 30 percent is collected in the second month following sale. November and December
    sales for 2003 were $220,000 and $175,000, respectively.
    Sharpe purchases its raw materials 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, purchases
    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 cash
    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 in the month of April the firm expects
    to have a need for an additional $60,500, these funds would be borrowed at the beginning of April
    with interest of $605 (.12 × 1/12 × $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 $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?

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    Solution Summary

    The solution explains how to prepare a cash budget