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6. Cash budget Aa Aa 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 45% 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 $1,100 million, then purchases during June would be $495 ($1,100 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 19% of sales, monthly rent of $40 million, and other expenses at 5% of sales. Estimated tax payments of $59 million and $61 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,000 million payment for a new plant must be made in September. Assume that Mellon's targeted cash balance is $300, and the estimated cash on hand on July 1 is $251. Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June October November December July $1,000 Credit sales $950 August $1,010 464 $980 450 September $1,030 473 $1,100 $1,050 486 $1,080 495 Credit purchases July August September October November December 198 202 206 212 216 Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously Total cash receipts 700 707 721 735 756 98 100 101 103 105 $996 $1,009 $1,028 $1,050 $1,077 Cash disbursements 450 455 464 486 495 Payments for credit purchases Wages and salaries Rent 190 192 196 205 209 40 40 40 40 40 Other expenses 50 51 52 54 55 Taxes 59 Payment for plant construction 1,000 $1,752 Total cash disbursements $789 $738 $785 $799 Net cash flow $188 -$743 $201 $265 $278 $258 439 251 697 -46 155 420 (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $439 $697 $155 $420 $698 300 300 300 300 300 $139 $397 -$145 $120 $398 Use the information provided in the budget to complete the following sentences. of $ 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 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. 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 spend 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 u generate in short-term marketable securities. 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 balance ortfall, and the financial managers can tell the bank to deficit expect that they will be able to invest up to $ in short-term marketable securiti of $ 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 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 n shortfall tell the bank to expect that they will be able to invest up to $ in short-term marketable securities. surplus 6. Cash budget Aa Aa 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 45% 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 $1,100 million, then purchases during June would be $495 ($1,100 million x 0.45), and this amount would be paid in July. Other cash expenses include wages and salaries at 19% of sales, monthly rent of $40 million, and other expenses at 5% of sales. Estimated tax payments of $59 million and $61 million are required to be paid on July 15 and October 15, respectively. In addition, a $1,000 million payment for a new plant must be made in September. Assume that Mellon's targeted cash balance is $300, and the estimated cash on hand on July 1 is $251. Use the preceding information to fill in the missing amounts in the following cash budget. Mellon Company Cash Budget For the Six Months Ended December 31, Year 1 ($ millions) May June October November December July $1,000 Credit sales $950 August $1,010 464 $980 450 September $1,030 473 $1,100 $1,050 486 $1,080 495 Credit purchases July August September October November December 198 202 206 212 216 Cash receipts Collections from this month's sales Collections from previous month's sales Collections from sales two months previously Total cash receipts 700 707 721 735 756 98 100 101 103 105 $996 $1,009 $1,028 $1,050 $1,077 Cash disbursements 450 455 464 486 495 Payments for credit purchases Wages and salaries Rent 190 192 196 205 209 40 40 40 40 40 Other expenses 50 51 52 54 55 Taxes 59 Payment for plant construction 1,000 $1,752 Total cash disbursements $789 $738 $785 $799 Net cash flow $188 -$743 $201 $265 $278 $258 439 251 697 -46 155 420 (Receipts - disbursements) Beginning cash balance Ending cash balance Target (minimum) cash balance Surplus (shortfall) cash $439 $697 $155 $420 $698 300 300 300 300 300 $139 $397 -$145 $120 $398 Use the information provided in the budget to complete the following sentences. of $ 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 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. 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 spend 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 u generate in short-term marketable securities. 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 balance ortfall, and the financial managers can tell the bank to deficit expect that they will be able to invest up to $ in short-term marketable securiti of $ 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 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 n shortfall tell the bank to expect that they will be able to invest up to $ in short-term marketable securities. surplus