CASH BUDGET QUESTION

(Preparation of a cash budget)Harrison Printing has projected its sales for the first eight months of 2014 as follows:

LOADING...

.

Harrison collects

20

percent of its sales in the month of the sale,

50

percent in the month following the sale, and the remaining

30

percent two months following the sale. During November and December of 2013, Harrison's sales were

$219,700

and

$175,800,

respectively.

Harrison purchases raw materials two months in advance of its sales equal to

65

percent of their final sales price. The supplier is paid one month after delivery. Thus, purchases for April sales are made in February and payment is made in March.

In addition, Harrison pays

$10,500

per month for rent and

$20,300

each month for other expenditures. Tax prepayments of

$22,500

are made each quarter beginning in March. The company's cash balance as of December 31, 2013, was

$22,200;

a minimum balance of

$20,000

must be maintained at all times to satisfy the firm's bank line of credit agreement. Harrison has arranged with its bank for short-term credit at an interest rate of

12

percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm were to need to borrow

$50,000

during the month of April, then it would pay

$500

($50,0000.121/12)

in interest during May. Finally, Harrison follows a policy of repaying its outstanding short-term debt in any month in which its cash balance exceeds the minimum desired balance of

$20,000.

a.Harrison needs to know what its cash requirements will be for the next six months so that, if necessary, it can renegotiate the terms of its short-term credit agreement with its bank. To analyze this problem, the firm plans to evaluate the impact of a

20%

variation in its monthly sales efforts. Prepare a seven-month cash budget for Harrison and use it to evaluate the firm's cash needs.

(Note:

You will need to prepare the cash budgets for three scenarios: most likely (sales given in

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), worst case (sales down by

20%),

and best case (sales up by

20%).)

b.Harrison has a

$200,600

note due in June. Will the firm have sufficient cash to repay the loan?

(Preparation of a cash budget) Harrison Printing has projected its sales for the first eight months of 2014 as follows: B Harrison collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the remaining 30 percent two months following the sale. During November and December of 2013, Harrison's sales were $219,700 and $175,800, respectively. Harrison purchases raw materials two months in advance of its sales equal to 65 percent of their final sales price. The supplier is paid one month after delivery. Thus, purchases for April sales are made in February and payment is made in March. In addition, Harrison pays $10,500 per month for rent and $20,300 each month for other expenditures. Tax prepayments of $22,500 are made each quarter beginning in March. The company's cash balance as of December 31, 2013, was $22,200; a minimum balance of $20,000 must be maintained at all times to satisfy the firm's bank line of credit agreement. Harrison has arranged with its bank for short-term credit at an interest rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm were to need to borrow $50,000 during the month of April, then it would pay $500 ($50,000