Question

*Problem 5-35 Marigold Products, a rapidly growing distributor of home gardening equipment, is formulating its plans for the coming year. Carol Jones, the firm's marketing director, has completed the following sales forecast. Month January February March April May June Sales $907,500 $1,004,000 $907,500 $1,158,500 $1,251,000 $1,400,500 Month July August September October November December Sales $1,507,500 $1,507,500 $1,609,100 $1,609,100 $1,507,500 $1,703,300 Phillip Smith, an accountant in the Planning and Budgeting Department, is responsible for preparing the cash flow projection. He has gathered the following information. • All sales are made on credit. • Marigold's excellent record in accounts receivable collection is expected to continue, with 60% of billings collected in the month after sale and the remaining 40% collected two months after the sale. • Cost of goods sold, Marigold's largest expense, is estimated to equal 40% of sales dollars. Seventy percent of inventory is purchased one month prior to sale and 30% during the month of sale. For example, in April, 30% of April cost of goods sold is purchased and 70% of May cost of goods sold is purchased. • All purchases are made on account. Historically, 75% of accounts payable have been paid during the month of purchase, and the remaining 25% in the month following purchase • Hourly wages and fringe benefits, estimated at 30% of the current month's sales, are paid in the month incurred. . General and administrative expenses are projected to be $1,566,800 for the year. A breakdown of the expenses follows. All expenditures are paid monthly throughout the year, with the exception of property taxes, which are paid in four equal installments at the end of each quarter. Salaries and fringe benefits Advertising Property taxes Insurance Utilities Depreciation Total $ 322,400 375,800 136,800 197,600 184,300 349,900 $ 1,566,800 • Operating income for the first quarter of the coming year is projected to be $324,300. Marigold is subject to a 40% tax rate. The company pays 100% of its estimated taxes in the month following the end of each quarter. . Marigold maintains a minimum cash balance of $50,000. If the cash balance is less than $50,000 at the end of the month, the company borrows against its 12% line of credit in order to maintain the balance. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in increments of $1,000). Accrued interest is paid in full with each principal repayment. The projected cash balance on April 1 is $57,700.

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Answer 1

Marigold Products Cash budget Calculation April May June April May 57,700 50,226 946,100 1,058,100 1,003,800 1,108,326 June 50,217 1,214,000 1,264,217 Quarter 57,700 3,218,200 3,275,900 475,295 347,550 26,867 31,317 529,020 375,300 26,867 31,317 578,185 420,150 26,867 31,317 34,200 16,467 15,358 =1,158,500*30% =322,400/12 =375,800/12 =1,251,000*30% =322,400/12 =375,800/12 =1,400,500*30% =322,400/12 =375,800/12 =136,800/4 =197,600/12 =184,300/12 16,467 15,358 Beginning Cash balance Add: Collections from sales Total cash available to spend Less: Cash payments Inventory purchases Wages and fringe benefits Salaries and fringe benefits Advertising Property taxes Insurance Utilities Income taxes Total cash payments Cash Excess (deficiency) Minimum cash balance Cash Excess (needed) Financing Borrowings at beginning Interest @ 12% Repayments at end Total Financing Ending Cash balance 1,582,500 1,143,000 80,601 93,951 34,200 49,401 46,074 129,720 3,159,447 116,453 50,000 66,453 16,467 15,358 129,720 1,042,574 (38,774) 50,000 (88,774) =197,600/12 =197,600/12 =184,300/12 =184,300/12 =324,300*40% This row should be entered as positive 994,329 113,997 50,000 63,997 1,122,544 141,673 50,000 91,673 Cash Excess (deficiency) - Minimum cash balance 89,000 (1,780) (62,000) (63,780) 50,217 (270) (27,000) (27,270) 114,403 89,000 Rounded off 88,774 to 89,000 for borrowings calculation (2,050) =89,000*12%*2/12 =27,000*12%*1/12 (89,000) (2,050) 114,403 Cash Excess (deficiency) + Total Financing 89,000 50,226