Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run 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 just how much she must 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 $4,300 per month, and the rent is $2,200 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $750, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard cash in the till, 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 $110,000.

Sales Purchases
December $120,000 $40,000
January 38,000 40,000
February 68,000 40,000
1.Prepare a cash budget for December, January, and February.

2.Now, suppose 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 question are minimal.)

Dorothy Koehl

CASH BUDGET

                                                    Dec             Jan                 Feb

Receipts

cash sales                                120000      38000              68000

loan                                           10750         8500                

total Receipt                            130750        46500             68000

Payments

cash paid to creditors            110000       40000            40000

salary                                       4300            4300             4300

Rent                                         2200            2200            2200

Tax payment                          10000

total payments                       126500        46500            46500

cash surplus(deficit)                4250             0                      21500

opening balance                      750               5000              5000  

closing balance                      5000               5000              26500

per month she can borrow Dec $10750 and in Jan $8500 then she can have more cash available or she can just borrow $19,250 in Dec that is the total of the two loans that way in december her bank balance will be above $5000 which will be a good thing she can then have the balance of $5000 in January and have it increase to $26500 in Feb.

2. Sells on credit

                                              Dec              Jan                 Feb

Cash from debtors                 -                 120000            40000

loan                                      130750

total Receipts                     130750           120000          40000

Payments

cash paid to creditors            110000       40000            40000

salary                                       4300            4300             4300

Rent                                         2200            2200            2200

Tax payment                          10000

total payments                       126500        46500          46500

Cash surplus                            4250           73500             - 6500

opening balance                         750           5000              78500

closing balance                        5000          78500               72000

Loan amount to be borrowed in dec is $130,750

Explanation:

cash paid to creditor

basis month following the purchase month meaning Nov paid in Dec

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