a. To compute Mike Epstein's likely cash balance or deficit for the end of the year, we need to follow these steps:
1. Start with the beginning cash balance of $120,000.
2. Determine the increase in assets due to the sales increase. Since Mike's net assets will remain at 50% of sales, the increase in assets is equal to 50% of the increase in sales.
Sales increase = $1,600,000 - $800,000 = $800,000
Asset increase = 50% x $800,000 = $400,000
3. Add the asset increase to the beginning cash balance.
New cash balance = $120,000 + $400,000 = $520,000
4. Calculate the profit based on the 10% return on total sales.
Profit = 10% x $1,600,000 = $160,000
5. Finally, add the profit to the new cash balance.
Final cash balance = $520,000 + $160,000 = $680,000
Based on the calculations, Mike's likely cash balance for the end of the year is $680,000.
b. If there had been no increase in sales, but all other facts remained the same, we can calculate Mike's ending cash balance using the same steps as in part (a).
1. Start with the beginning cash balance of $120,000.
2. Since there is no increase in sales, the asset increase is also zero.
3. Add the asset increase (zero) to the beginning cash balance.
New cash balance = $120,000 + 0 = $120,000
4. Calculate the profit based on the 10% return on total sales.
Profit = 10% x $800,000 = $80,000
5. Finally, add the profit to the new cash balance.
Final cash balance = $120,000 + $80,000 = $200,000
The solution of the two problems illustrates that an increase in sales has a significant impact on the cash position of a company. In the first scenario with increased sales, Mike's cash balance is $680,000, whereas in the second scenario with no sales increase, the cash balance is only $200,000.
c. To prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget for Buzz Air for June through September, we need to follow these steps:
1. Start with the ending cash balance in May, which is $20,000.
2. For each month, calculate cash receipts:
- Calculate cash sales as 10% of the forecasted sales for that month.
- Calculate credit collections for that month as 20% of the sales made two months prior and 80% of the sales made one month prior. Add these two amounts together.
- Add the cash sales and credit collections to get the total cash receipts for the month.
3. For each month, calculate cash payments:
- Calculate payments for purchases as 40% of the purchases made one month prior and 60% of the purchases made two months prior. Add these two amounts together.
- Calculate labor expenses as 10% of the current month's sales.
- Add labor expenses, payments for purchases, overhead expenses, interest payments, tax payments, and any other expenses to get the total cash payments for the month.
4. Calculate the net cash flow for each month by subtracting cash payments from cash receipts.
5. Calculate the new cash balance for each month by adding the net cash flow to the previous month's ending cash balance.
6. Determine if there is excess cash (above $50,000) or a cash shortfall (less than $15,000) for each month.
- If there is excess cash, use it to buy marketable securities.
- If there is a cash shortfall, sell marketable securities first before borrowing funds.
7. Repeat steps 2-6 for each month from June through September.
8. Continue the calculations until September to determine the final cash balance and any borrowing or repayment needs.
Note: The calculations can be complex, involving multiple steps for each month. It is recommended to use a spreadsheet or financial software to perform these calculations efficiently.