Question

Wickford Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Wickford's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Wickford's sales are made on credit with terms of 2/10, net 30. Wickford's experience is that 25% is collected from customers who take advantage of the discount, 65% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. . · The cost of materials averages 50% of Wickford's finished product. The purchases are generally made one month in advance of the sale, and Wickford pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,320 million, then purchases during June would be $660 ($1,320 million x 0.50), and this amount would be paid in July. * Other cash expenses include wages and salaries at 16% of sales, monthly rent of $48 million, and other expenses at 5% of sales. Estimated tax payments of S70 million and $73 milion are required to be paid on July 15 and October 15, respectively. In addition, a $1,200 million payment for a new plant must be made in September Assume that Wickford's targeted cash balance is $300, and the estimated cash on hand on July 1 is $267. Use the preceding information to fill in the missing amounts in the following cash budget.

Answer 1

Wickford Company Cash Budget For the Six Months Ended December 31, Year 1 $ millions) August September October 1,236 630 September October June November December Credit sales Credit Purchases 1,200 606 1,212 618 1,260 648 1,140 1,176 600 1,296 660 1,320 August November December Cash Receipits Collections from this month' sales Collections from previous month sales Collections from sales two month previously Total Cash Receipts 764 114 1,172 297 780 118 1,195 788 120 1,211 318 819 124 1,261 323 842 126 1,291 121 1,233 Cash Disbursements Payments for Creditors (i.e Previouse Months Credit Purchases) wages and salaries (16% of Credit sales) Rent (Fixed) Other Expenses (5% of Credit Sales) Taxes Payment for Plant construction Total Cash Disbursement 618 198 192 48 194 48 211 48 207 65 73 1,200 2,126 970 1,016 985 218 Net Cash flow (Receipt Disbursement) Beginning Cash Balance Ending Cash Balance (Net Cash flow Beginning Cash balance) Target (minimum) cash balance Surplus (Shortfall) cash (Ending Cash Balance- Target Cash balance) 202 267 469 300 169 286 469 755 300 455 (915) 755 (160) 300 (460) 293 (160) 350 656 300 356 350 300 300 (243)

Working Notes: 1) Credit Purchases: 50% of Next Month Sales Credit Purchases of July: 50% of August Sales Credit Purchases of Julys (1212 * 5096) 606 2) Calcultion of Cash receipts in July Collection of July sales in same Month July Collection of July sales (1,200 * 25%) Less: 2% discount (300 * 296) Net Collection from July Sales Collection of June sales (1,176 * 65%) Collection of May sales (1,140 * 10%) 1,200 6 764 114

Use the Information provided in the budget to complete the following Sentence Wickford Company will be able to invest the in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Wickford will generate, $389M to end the year with a cash Balance of $656M and a Cash Surplus of $356M. Wickford Company will want a credit of line at atleast $460M to cover the month with the greatest shortfall, and the financial manages can tell the bank to expect that they will be able to invest upto $455M in short-term marketable securities. financialmanagescan tell upto-in short-termomarketablesecur Working Notes: Calculation of Cash Generation/(Spend) During the six months Month July August September October Novemeber December Total Cash Generat/(Spend) Net Cash flow 202 286 (915) 218 293 306 389