Problem:
The CELLO Company wants a Master Budget for the next three months beginning January 1, 2009. It desired an ending minimum cash balance of $4000 each month. Sales are forecasted at average selling prices of $4 per unit. Inventories are supposed to equal 125% of the next month’s sales in UNITS, except for the end of March. The March 31 inventory in units should be 75% of the next month’s sales. (i.e. April’s sales in units). Merchandise costs are $2 per unit. Purchases during any given month are paid in full during the following month. All sales are on credit, payable within 30 days, but experience has shown that 40% of current sales are collected in the current month, 40% in the next month, and 20% in the month thereafter. Bad debts are negligible. (Ignore federal and state income taxes.)
Monthly operating expenses are as follows:
Wages and salaries (cash) $12,000
Miscellaneous (cash) 2,000
Rent 100 + 10% of monthly sales
Insurance Expired 100
Depreciation 100
Cash dividends of $1000 are to be paid Quarterly, beginning January 15, and are declared on the 15th of the previous month. All operating expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $100 is paid at the beginning of each month, and the additional rent of 10% of sales is paid quarterly on the tenth of the month following the quarter. The next settlement is due January 10th.
The CELLO Comapany plans to buy some new furniture and fixtures for $2000 cash in March. Money can be borrowed or repaid in multiples of $500, at an interest rate of 6% per annum. Management wants to minimize borrowing and repay rapidly. Interest is computed and paid when the principal is repaid. Assume that borrowing takes place at the beginning, and repayment at the END of the months in question. Money is never borrowed at the beginning and repaid at the end of the SAME month. Compute interest to the nearest dollar. (round up).
The CELLO Company
Balance Sheet
12/31/08
Assets Liabilities
Cash $4,000 Accounts Payable (Mdse.) $28,750
Accounts Receivable 16,000 Dividends Payable 1,000
Inventory 31,250 Rent Payable 7,000
Prepaid insurance 1,200 Total Liabilities $36,750
Fixed Assets-net 10,000 Stockholders Equity
Total $62,450 Common Sock 10,700
Retained Earnings 15,000
Total 25,700
Total Liabilities & Equity $62,450
Recent and Forecasted Sales:
October $30,000 November $20,000 December $20,000
January $50,000 February $55,000 March $12,000
April $36,000
Required: Prepare a Master Budget, including a budgeted balance sheet, budgeted income statement, cash flow statement, cash receipts and disbursements (cash budget), and supporting budgets and schedules for the first quarter only of 2009.
Explain the roll cash flow analysis plays in the effective management of the organization. What if CELLO did not have access to a bank line of credit? What other sources of cash are available for Management to utilize to bridge cash shortfalls?