Question

You have recently beenhired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard oxes in a variety of sizes. Gary Piepkom, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that's what you've been brought in to do. The company currently has a cash balance of $154,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $325,000. THe purchase of the machinery will be made with cash because of the discount offered. The company's policy is to maintain a target cash balance of $100,000. All sales are in cash and all purchases are made on credit Gary Piepkorn has projected the following gross sales for each of the next four quarters Q1 Q2 Q3 Q4 Gross sales $863,500 $918,500 $996,000 $924,000 Gross sales for the first quarter of next year are projected at $908,000 Piepkorn typically orders 50 percent of next quarter's projected gross sales in the current quarter, and suppliers are typically paid in 53 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $115,000 on its long-term debt. The company uses a local bank for its short- term financial needs. It pays 1.5 percent per quarter on all short term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs. QUESTIONS 1. Use the numbers given to complete the cash budget and short-term financial plan. 2. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $80,000. PIEPKORN MANUFACTURING Cash Budget Q1 Q2 Q3 Q4 Beginning cash balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit) PIEPKORN MANUFACTURING Short-Term Financial Plan Q1 Q2 Q3 Q4 Target cash balance Net cash inflow New short-term investments Income from short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance Cumulative surplus (deficit) Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt

Answer 1

Piepkom Manufacturing
Cash Budget
		Q1	Q2	Q3	Q4
Beganing Cash balance		$ 154000	100000	100000	100000
Cash inflow
Cash Sales (Working note -1)		$ 459250	$ 498000	$ 462000	$ 454000
Total Cash inflow (a)		$ 459250	$ 498000	$ 462000	$ 454000
Cash Outflow
Purchase of Machinery					$ 325000
Interest on long term debt		$ 115000	$ 115000	$ 115000	$ 115000
Wages, Tax and others cost		$ 289050	$ 275550	$ 298800	$ 277200
Total Cash outflow(b)		$ 404050	$ 390550	$ 413800	$ 717200
Net cash inflow (a-b)		$ 209200	$ 207450	$ 148200	-$ 163200
Minimum Cash Balance ( c)		-$ 100000	-$ 100000	-$ 100000	-$ 100000
Cumulative surpuls (a-b-c)		$ 109200	$ 107450	$ 48200	-$ 263200
Short Term Investment (> figure of (a-b-c))		$ 109200	$ 108542	$ 50377
Sold of Short term Investment					$ 260497
Interest received on short term Investment			$ 1092	$ 2177	$ 2703
Cash Balance		$ 100000	$ 100000	$ 100000	$ 100000

Working Notes :
Cash inflow from sales
in Question it is mention Piepkom orders 50% of next Quarter Gross Sales
As all sales are cash sales , so cash received in each Quarter will be equal to 50% of next sales
Hence
Cash received in Q1	Sales of Q2 x 50%		=$918500 X 50%		$ 459250
Cash received in Q2	Sales of Q3 x 50%		=$996000 X 50%		$ 498000
Cash received in Q3	Sales of Q4 x 50%		=$924000 X 50%		$ 462000
Cash received in Q3	Sales of Q1 nex year x 50%		=$908,000 X 50%		$ 454000
Total Cash inflow from sales					$ 1873250
Cash Outflows
Purchase of Machinery in Q4					$ 325000
Interest paid on long term debt ($115000 per quarter)
Q1				$115000
Q2				$115000
Q3				$115000
Q4				$115000	$ 460000
Wages, Tax and others cost
Q1		=$963500 X 30%		$289050
Q2		=$918500 X 30%		$275550
Q3		=$996000 X 30%		$298800
Q4		=$924000 X 30%		$277200	$ 1140600
Computation of Short term investment
Q1 (Cumulative Surplus amount)		$109200
Q2 (Cumulative Surplus amount + Interest received)		$108542
Q3 (Cumulative Surplus amount + Interest received)		$ 52555
Interest Computation
We assume invest on end of the quarter and sold the investment on end of quarter
Interest on Q2	=$109200 X1%	$ 1092
Interest on Q3	=$217742X1%	$ 2177
($109200+$108542)
Interest on Q4	=$270297X1%	$ 2703
Sold of investment
Q4 Cumulative surplus -Interest received		=$263200-$2703		$260497

	Q1	Q2	Q3	Q4
Bengining Cash Balance	$ 154000	$ 100000	$ 100000	$ 100000
Net Cash Inflow	$ 209200	$ 207450	$ 148200	-$ 163200
Less :-New Short term Investment	$ 109200	$ 108542	$ 50377	$ 0
New Short term Borrowing	$ 0	$ 0	$ 0	$ 0
Income from short term investment	$ 0	$ 1092	$ 2177	$ 2703
Interest Short term Borrowing	$ 0	$ 0	$ 0	$ 0
Sold Short term Investment				$ 260497
Ending Cash Balance	$ 254000	$ 200000	$ 200000	$ 200000
Minimum Cash flow	-$ 100000	-$ 100000	-$ 100000	-$ 100000
Cumulative Surplus (Deficit)	$ 154000	$ 100000	$ 100000	$ 100000
Beganing Short term Investment	$ 0	$ 0	$ 0	$ 0
Beganing Short term Debt	$ 0	$ 0	$ 0	$ 0
Ending Short term Investment	$ 0	$ 0	$ 0	$ 7622
Ending Short term Debt	$ 0	$ 0	$ 0	$ 0