Patricia Smith recently leased space in the Southside Mall and opened a new business, Smiths Coin Shop.

Patricia Smith recently leased space in the Southside Mall and opened a new business, Smith’s Coin Shop. Business has been good, but Smith frequently runs out of cash. This shortcoming has necessitated late payment on certain orders, which in turn is beginning to cause a problem with suppliers. Smith plans to borrow from the bank to have cash ready as needed, but first she needs to forecast how much she must borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when the business needs will be especially high. Sales are made on a cash basis only. Smith’s purchases of materials must be paid for during the month following the purchases. Smith pays herself a salary of $4,800 per month, and the store’s rent is $2,000 per month. In addition, Smith must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Smith has agreed to maintain an average bank balance of $6,000—this amount is her target cash balance. (Disregard till cash, which is insignificant because Smith keeps only a small amount on hand to lessen the chances of robbery.) The firm’s estimated sales and purchases for December, January, and February are shown in the following table. Purchases during November amounted to $140,000.

a. Prepare a cash budget for December, January, and February.
b. Suppose that Smith started selling on a credit basis on December 1, giving customers 30 days to pay; all customers accept these terms (paying 30 days after purchases); and all other facts in the problem remain unchanged. What would the company’s loan requirements be at the end of February in thiscase?

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Sales $160,000 60,000 Purchases December January February $40,000 40,000 40,000