Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,500 per month, and the rent is $2,500 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $450, but Koehl has agreed to maintain an average bank balance of $5,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $120,000.

Sales Purchases
December $170,000 $35,000
January 34,000 35,000
February 68,000 35,000

  1. Prepare a cash budget for December, January, and February. Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

    Collections and Purchases:
    December January February
    Sales (Collections) $ $ $
    Purchases $ $ $
    Payments for purchases $ $ $
    Salaries $ $ $
    Rent $ $ $
    Taxes $ --- ---
    Total payments $ $ $
    Cash at start of forecast $ --- ---
    Net cash flow $ $ $
    Cumulative cash balance $ $ $
    Target cash balance $ $ $
    Surplus cash or loans needed $ $ $

  2. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.) Do not round intermediate calculations. Round your answer to the nearest dollar.

    $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Governing The Modern Corporation Capital Markets Corporate Control And Economic Performance

Authors: Roy C. Smith, Ingo Walter

1st Edition

0195171675,0199924015

More Books

Students also viewed these Finance questions

Question

What do you understand by Mendeleev's periodic table

Answered: 1 week ago