Potter Corporation sells office supplies to government agencies. The company reports the following selected account balances at beginning of the current quarter:
cash $10,000
accounts receivable $200,000
current payables 85,000
Management of Potter's has made given budget estimates regarding operations for the current quarter:
sales (estimated) 500,000
total costs as well as expenses (estimated) $400,000
debt service payment (estimated) 145,000
tax liability payment (estimated) 45,000
Of potter's total costs as well as expenses, $30,000 is quarterly depreciation expense, as well as $20,000 represents the expiration of prepayments. The remaining $350,000 is to be financed with current payables. The ending of company prepayments balance is expected to be the same as its beginning prepayments balance. It's ending present payables balance is expected to be $20,000 more than its beginning balance.
All of potter's sales are on account approximately 65 percent of its sales are collected in the quarter in which they completed. The outstanding 35% are collected in the following quarter. The reason is that all of the company's sales are made to government agencies; as it occurrence virtually no uncollectible accounts.
Potter's minimum cash balance requirement is $10,000. Below this amount should the balance fall, management negotiates a short-term loan with a local bank. The company's debt ratio (liabilities / assets) is currently 80 percent.
Instructions:
a. Calculate potter's budgeted cash receipts for the quarter.
b. Calculate potter's payments of current payables budgeted for the quarter.
c. Calculate potter's cash prepayments budgeted for the quarter.
d. Prepare potter's cash budget for the quarter
e. Estimate potters short-term borrowing requirements for the quarter.
f. Discuss problems potter might encounter in obtaining short-term financing.