Financial planning involves preparation of cash budget.
Presented below are the budgeted income statements for the second quarter of 2007 for Southside Tech, Inc.:
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April
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May
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June
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Sales
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$ 112,000
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$ 136,000
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$ 152,000
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Cost of goods sold *
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76,800
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91,200
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100,800
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Gross profit
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$ 35,200
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$ 44,800
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$ 51,200
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Operating expenses **
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17,600
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20,000
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21,600
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Operating income
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$ 17,600
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$ 24,800
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$ 29,600
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* Includes all product costs (i.e., direct materials, direct labor, and manufacturing overhead).
** Includes all period costs (i.e., selling, general, and administrative expenses)
The company expects about 40% of sales to be cash transactions. Of sales on account, 65% are expected to be collected in the first month after the sale is made, and 35% in the second month after sale. Depreciation, insurance, and property taxes represent $9,600 of the estimated monthly cost of goods sold, and $6,400 of the estimated monthly operating expenses.
The annual insurance premium is paid in January, and the annual property taxes are paid in August. Of the remainder of the cost of goods sold and operating expenses, 90% are expected to be paid in the month in which they are incurred, and the balance in the following month.
Current assets as of April 1, 2007, consist if cash of $11,200 and accounts receivable of $119,840 ($84,000 from March credit sales and $35,840 from February credit sales). Current liabilities as of April 1 consist of: $14,400 of accounts receivable for product costs incurred in March, $3,680 of accrued liabilities for operating expenses incurred in March, and a $38,000, 12%, 120-day note payable that is due on April 17, 2007.
An estimated income tax payment of $36,000 will be made in May. The regular quarterly dividend of 12,800 is expected to be declared in May and paid in June. Capital expenditures amounting to $13,760 will be made in April.
Instructions:
Please proceed to the \"Analysis\" worksheet and complete the basic problem requirements. Complete the problem requirements by entering appropriate amounts or formulas in shaded worksheet cells:
a. Complete the monthly cash budgets for the second quarter of 2004 using the format shown on the \"Analysis\" worksheet. Note that the ending cash balance for June is provided as a check figure.
b. Assume that management of Southside Tech, Inc., desires to maintain a minimum cash balance of $10,000 at the beginning of each month, and that a $50,000 line of credit has been arranged with a local bank at an interest rate of 10% to ensure the availability of funds. Borrowing transactions are to occur only at the end of the month in which the budgeted cash balance would otherwise fall short of the $10,000 minimum balance. Repayments of principle and interest are to occur at the end of the earliest month in which sufficient funds are expected to be available for repayment. Explain how this minimum cash balance requirement would affect the monthly cash budgets prepared in part a above.
After completing the \"Analysis\" worksheet, please proceed to the \"What the Numbers Mean\" worksheet and respond to the additional requirements presented.
1) What does it mean?
How do revenues in the income statement differ from cash receipts in the cash budget for the same period of time?
2) What does it mean?
How do expenses in the income statement differ from cash payments in the cash budget for the same period of time?
3) What does it mean?
Explain how the minimum cash balance requirement in part b of the problem affects the monthly cash budgets prepared in part a of the problem.
4) What does it mean?
Explain a cash management strategy that might require a minimum, as well as a maximum, cash balance of $10,000 at the end of each month.