Please see the attached document.
(Cash budget) The Sharpe Corporation's projected sales for the first eight months of 2004 are as follows:
January $ 90,000
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
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?
Please see the attached file for the full solution formatted neatly.
The Sharpe Corporation Cash Budget Worksheet
Nov Dec Jan Feb Mar Apr May June July Aug
Sales 220,000 175,000 90,000 120,000 $135,000 $240,000 $300,000 $270,000 $225,000 $150,000
Month of sale (10%) 9,000 12,000 13,500 24,000 30,000 27,000 22,500
First month (60%) 105,000 54,000 72,000 81,000 144,000 180,000 162,000
This solution demonstrates how to construct a proper cash budget for Sharpe Corporation. An Excel file is attached which presents this cash budget in a neat format and illustrates how to compute the required values. By clicking directly onto the cells, it indicates how the values have been derived.