. Cash budgeting

The actual sales and purchases for Adams Sounds Co. for July and August 2013, along with its forecast sales and purchases for the period September 2013 through February 2014, follow.

Year	Month	Sales	Purchases
2013	July	$310,000	$220,000
2013	August	$350,000	$250,000
2013	September	$270,000	$240,000
2013	October	$260,000	$200,000
2013	November	$240,000	$180,000
2013	December	$280,000	$210,000
2014	January	$300,000	$200,000
2014	February	$350,000	$190,000

The firm makes 30% of all sales for cash and collects 35% of its sales in each of the two months following the sale. Other cash inflows are expected to be $22,000 in September and February, $25,000 in November and January, and $37,000 in December. The firm pays cash for 20% of its purchases. It pays for 40% of its purchases in the following month and for 40% of its purchases two months later.

Wages and salaries amount to 15% of the preceding months sales. The firm must pay lease expenses of $30,000 per month. Interest payments of $20,000 are due in November and February. A principal payment of $50,000 is also due in February. The firm expects to pay a cash dividend of $30,000 in November and February. Taxes of $120,000 are due in April. The firm also intends to make a $55,000 cash purchase of fixed assets in October.

(a)Assuming that the firm has a cash balance of $42,000 at the beginning of September and that its desired minimum cash balance is $25,000, prepare a cash budget for September through February.

(b)If the firm is requesting a line of credit, how large should the line be? Explain your answer.