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    Cash budget

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    Cash Budget

    The Hale Company is currently working on its cash budget for the coming year. The following information is available:

    Projected sales for the coming year:

    Month Projected Sales

    January $850,000
    February 750,000
    March 730,000
    April 850,000
    May 830,000
    June 750,000
    July 900,000

    The collection history of the Hale Company has been as follows:
    > 20% of sales are collected in the month of the sale.
    > 60% of the sales are collected in the month following the sale.
    > 12% of the sales are collected in the 2nd month following the sale.
    > 5% of the sales are collected in the 3rd month following the sale.

    The following information regarding costs is available:
    > The cost of goods sold is 54% of sales
    > Items for sale are purchased in the month of the sale.
    > 80% of accounts payable are paid in the month following when the cost is incurred.
    > 20% of accounts payable are paid in the 2nd month following when the cost is incurred.
    > Wages are 28% of sales and are paid currently
    > Annual general and administrative costs are $1,411,200 and are incurred evenly throughout the year.
    > Annual property taxes are $14,000 and are paid semiannually in June and October.
    > A $10,000 cash capital purchase will be made in April.

    The beginning cash balance in April is expected to be $47,000. The Hale Company has a policy of maintaining a minimum cash balance of $45,000. The company has an arrangement with a local bank for a line of credit that carries a 10% annual interest rate. If the ending monthly balance falls below $45,000, the company will borrow against the line of credit so that the minimum balance can be maintained. If the company has borrowed against the line of credit and a cash balance is expected to be above $45,000 at the end of a particular month, then repayments will be made bringing the cash balance down to $45,000. Interest on the line of credit is paid monthly. Assume that all line of credit transactions occur on the last day of the month.

    Required:
    Prepare a cash budget for the Hale Company for the 2nd quarter of the year. Include April, May, June, and a quarter total in your budget.

    Thanks for your help on this! I needed help getting started and was struggling.

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    Solution Summary

    The solution explains how to prepare a cash budget

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