a. Mike Epstein is very optimistic because sales for his feed store are expected to double from $800,000 to $1,600,000 next year. His net assets (Assets – Liabilities) will remain at 50% of sales. The company will enjoy a 10 percent return on total sales. He will start the year with $120,000 in the bank and is bragging about the nice fishing boat he will soon be able to buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50% of the sales increase) and add in profit.
b. In the above problem, if there had been no increase in sales and all other facts were the same, what would Mike’s ending cash balance be? What lesson does the solution of the two problems illustrate?
c. Buzz Air’s actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September.
Sales Purchases
April (actual) $420,000 $220,000
May (actual) 390,000 210,000
June (forecast) 400,000 200,000
July (forecast) 350,000 250,000
August (forecast) 410,000 300,000
September (forecast) 430,000 220,000
The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, 20 percent are collected in the month after the sale and 80 percent are collected two months later. Buzz Air pays for 40 percent of its purchases in the month after purchase and 60 percent two months after.
Labor expense equals 10 percent of the current month’s sales. Overhead expense equals $15,000 per month. Interest payments of $40,000 are due in June and September. A cash dividend of $20,000 is scheduled to be paid in June. Tax payments of $35,000 are due in June and September. There is a scheduled capital outlay of $300,000 in September.
Buzz Air’s ending cash balance in May is $20,000. The minimum desired cash balance is $15,000. Prepare a schedule of monthly cash receipts, monthly cash payments, and a complete monthly cash budget with borrowing and repayments for June through September. The maximum desired cash balance is $50,000. Excess cash (above $50,000) is used to buy marketable securities. Marketable securities are sold before borrowing funds in case of a cash shortfall (less than $15,000)
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