Problem 2 You have recently been hired by Carbox Manufacturing to work in its estab- lished treasury department. Carbox Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Currently, the com- pany basically puts all receivables in one pile and all payables in another, and a part-time bookkeeper periodically comes in and attacks the piles. Because of this disorganized system, the finance area needs work, and that's what you've been brought in to do. The company currently has a cash balance of $210,000, and it plans to purchase new machinery in the third quarter at a cost of $390,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. The company wants to maintain a minimum cash balance of $135,000 to guard against unforeseen contingencies. All of Carbox's sales to customers and purchases from suppliers are made with credit, and no discounts are offered or taken. The company had the following sales each quarter of the year just ended: Q1 Q2 Q3 Q4 Gross sales $1,102,000 $1,141,000 $1,125,000 $1,063,000 - = After research and discussions with customers, you are projecting that sales will be 8% higher in each quarter next year. Sales for the first quarter of the following year are also expected to grow at 8%. You calculate that Carbox currently has an accounts receivable period of 57 days and an accounts receivable balance of $675,000. However, 10% of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion will never be collected. A 57-day collection period implies all receivables outstanding from the previous quarter are collected in the current quarter, and (90 57)/90 = 11/30 of current sales are collected. You have also calculated that Carbox typically orders supplies each quarter in the amount of 50% of the next quarter's projected gross sales, and suppliers are paid in 53 days on average. Since the payables period is 53 days, the payment in each period is 53/90 of last quarter's orders, plus 37/90 of this quarter's orders. Wages, taxes, and other costs run about 25% of gross sales. The company has a quarterly interest payment of $185,000 on its long-term debt. You are asked you to prepare a cash budget for the company under the current policies using the numbers provided. Note: The net cash flow each quarter consists of the sales collection, minus the suppliers paid, expenses, dividends, interest, and capital outlays. The cash budget: Qi Q2 Q3 Q4 Beginning cash balance Collections from previous quarter Collections from current quarter sales Payments to suppliers for previous quarter Payments to suppliers for current quarter Wages, taxes, and other expenses Interest Capital outlay Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit)
