6. Cash budget Hansborough Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Hansborough's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Hansborough's sales are made on credit with terms of 2/10, net 30. Hansborough's experience is that 15% is collected from customers who take advantage of the discount, 75% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. The cost of materials averages 45% of Hansborough's finished product. The purchases are generally made one month in advance of the sale, and Hansborough pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $545 ($1,210 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 18% of sales, monthly rent of $44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September. Assume that Hansborough's targeted cash balance is $300, and the estimated cash on hand on July 1 is $284. Hansborough Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June October July $1,100 $1,045 $1,078 August $1,111 510 December $1,210 Credit sales Credit purchases September $1,133 520 November $1,188 545 $1,155 535 495 July August September October November December 163 167 170 175 178 Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously Total cash receipts 825 833 850 866 891 108 110 111 113 116 $1,096 $1,110 $1,131 $1,154 $1,185 495 510 535 545 500 200 198 204 214 218 44 44 44 44 44 55 56 57 59 61 64 Cash disbursements Payments for credit purchases Wages and salaries Rent Other expenses Taxes Payment for plant construction Total cash disbursements Net cash flow (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash 1,100 $1,915 $856 $800 $852 $868 $220 $234 $296 504 -$805 800 $302 229 $317 531 284 -5 $848 $504 300 $800 300 $229 300 $531 300 300 $204 $500 -$71 $231 $548 6. Cash budget Hansborough Company's financial managers are meeting with the company's bank to renew their line of credit and discuss their investment needs. They have prepared the company's operating cash budget for the last six months of the year. The following budget assumptions were used to construct the budget: Hansborough's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Hansborough's sales are made on credit with terms of 2/10, net 30. Hansborough's experience is that 15% is collected from customers who take advantage of the discount, 75% is collected in the second month, and the last 10% is collected in the third month after the sale. The budget assumes that there are no bad debts. The cost of materials averages 45% of Hansborough's finished product. The purchases are generally made one month in advance of the sale, and Hansborough pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $545 ($1,210 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 18% of sales, monthly rent of $44 million, and other expenses at 5% of sales. Estimated tax payments of $64 million and $67 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,100 million payment for a new plant must be made in September. Assume that Hansborough's targeted cash balance is $300, and the estimated cash on hand on July 1 is $284. Hansborough Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June October July $1,100 $1,045 $1,078 August $1,111 510 December $1,210 Credit sales Credit purchases September $1,133 520 November $1,188 545 $1,155 535 495 July August September October November December 163 167 170 175 178 Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously Total cash receipts 825 833 850 866 891 108 110 111 113 116 $1,096 $1,110 $1,131 $1,154 $1,185 495 510 535 545 500 200 198 204 214 218 44 44 44 44 44 55 56 57 59 61 64 Cash disbursements Payments for credit purchases Wages and salaries Rent Other expenses Taxes Payment for plant construction Total cash disbursements Net cash flow (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash 1,100 $1,915 $856 $800 $852 $868 $220 $234 $296 504 -$805 800 $302 229 $317 531 284 -5 $848 $504 300 $800 300 $229 300 $531 300 300 $204 $500 -$71 $231 $548