6. Cash budget Mellon 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: Mellon's total sales for each month were first calculated in the sales budget and are reflected on the first line of the cash budget. Mellon's sales are made on credit with terms of 2/10, net 30. Mellon's experience is that 20% is collected from customers who take advantage of the discount, 70% 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 55% of Mellon's finished product. The purchases are generally made one month in advance of the sale, and Mellon pays its suppliers in 30 days. Accordingly, if July sales are forecasted at $1,210 million, then purchases during June would be $666 ($1,210 million x 0.55), and this amount would be paid in July. Other cash expenses include wages and salaries at 19% 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 Mellon's targeted cash balance is $157, and the estimated cash on hand on July 1 is $157. Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 (5 millions) October May $1,045 June $1,078 605 Credit sales November December $1,188 $1,210 $1,155 July $1,100 611 July August $1,111 623 August September $1,133 635 September Credit purchases 653 666 October November December Cash receipts Collections from this month's 218 222 226 233 237 sales 770 778 778 793 793 809 832 108 110 111 113 116 Collections from previous month's sales Collections from sales two months previously Total cash receipts Cash disbursements Payments for credit purchases $1,096 $1,110 $1,110 $1,130 $1,130 $1,155 $1,185 666 605 209 611 211 623 215 653 226 Wages and salaries Rent Other expenses Taxes 1,100 $977 $922 $2,039 $982 $1,001 $99 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 $174 256 -$929 430 -$673 $107 -499 157 $184 -219 -$35 $430 -$392 $173 -392 -$219 157 -$376 $256 157 $99 157 157 157 $273 -$549 -$192 Use the information provided in the budget to complete the following sentences. Mellon Company will be able to invest in short-term marketable securities in some months and will need to borrow to cover cash requirements in others. In the last six months of the year, Mellon will to end the year with a cash of $ and a cash of $ . Mellon Company will want a credit line of at least $ to cover the month with the greatest shortfall, and the financial managers can tell the bank to expect that they will be able to invest up to $ in short-term marketable securities. Grade It Now Save & Continue Continue without saving Tvity leavePagelinkNoSave' leave