Question

Given the following information, construct the firm's cash budget for the given months and answer the questions.

• All sales are for credit and collections occur after 30 days.

• A $100,000 Treasury bill matures in March.

• Monthly fixed disbursements are $25,000.

• Variable disbursements are 40 percent of sales and occur one month prior to sales. (Variable cash disbursements are given for April.)

• A tax payment of $30,000 is due in April.

• A payment of $50,000 is to be received in February.

• The initial cash is $20,000.

• The minimum required cash balance is $10,000.

 

 

1.     At the end of March, what are the firm's (1) accounts receivable, (2) marketable securities, and (3) accounts payable?

2.     What is the maximum amount that the firm may have to borrow? If your answer is "None," give a reason that verifies your answer.

3.     If the firm used accelerated depreciation instead of straight-line depreciation, how would that affect the cash budget?

 

Answer 1

Accounts collected with 1 month lag will consist of result of total sales- cash sales. Hence, accounts collected with 1 month lag will start from March month and amount collected in this month will be total sales of February month- cash sales of February month (i.e. $200,000-0 =$200,000).

Treasury bills will mature in March and hence, it will be a cash inflow in the month of March.

Cash surplus/ deficit during the month can be calculated as Total cash inflows- Total cash outflows.

Cash position at the beginning of the month is the closing cash balance of last month. For the month of January, $20,000 as the opening cash balance is given. Opening cash balance for February will be closing balance of January.

Cash Position at the end of month is the sum total of cash surplus/ deficit during month and cash position at beginning of month.

Desired level of cash is given as $10,000.

Hence, Cumulative excess/shortage of cash can be calculated as Cash Position at the end of month + Desired level of cash.

Cash Budget (Amount in $)

Sources of Cash Inflows	Jan	Feb	Mar	Apr	May
Total Sales		200,000	230,000	200,000
Cash Sales	0	0	0	0
Collections	0	0	200,000	230,000	200,000
Other Receipts		50,000	100,000
Total Cash Receipts		50,000	300,000	230,000
Sources of Cash Outflows
Variable Cash disbursements	80000	92000	80000	70,000
Fixed Cash Disbursement		25,000	25,000	25,000
Other Cash Disbursements				30,000
Total Cash Outflows		117,000	105,000	95,000
Cash Surplus/ deficit during the month		-67,000	195,000	135,000
Cash position at beginning of the month	20,000	30,000	-37,000	158,000
Cash Position at the end of month		-37,000	158,000	293,000
Desired level of cash	-10,000	-10,000	-10,000	-10,000
Cumulative excess/shortage of cash		-47,000	148,000	283,000

a. At the end of March accounts receivable is $200,000 i.e. credit sales of the month of February. Marketable securities are of amount $100,000 as Treasury Bills. Accounts payable is $105,000.

b. Maximum amount that a firm has to borrow is $47,000 in the month of February.

c. It will not affect the cash budget anyway as depreciation ultimately doesn’t carry any impact on the cash budget.