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Chapter 22: Q34E (page 1238)

Preparing a financial budget鈥攃ash budget, sensitivity analysis

Leichter Auto Parts, a family-owned auto parts store, began January with \(10,500 cash. Management forecasts that collections from credit customers will be \)11,000 in January and \(15,200 in February. The store is scheduled to receive \)8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases (\(15,600 in January and \)14,800 in February) and selling and administrative expenses (\(2,900 each month).

Leichter Auto Part'sbank requires a \)10,000 minimum balance in the store鈥檚 checking account. At the end of any month when the account balance falls below \(10,000, the bank automatically extends credit to the store in multiples of \)1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of \(2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.

Requirements

1. Prepare Leichter Auto Part'scash budget for January and February.

2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total \)14,200 instead of $15,200?

Short Answer

Expert verified

Answer

Leichter Auto Parts will borrow $ 2,000 in February if the collection from the customer is $ 14,200 instead of $ 15,200 that month.

Step by step solution

01

Sensitivity analysis


January

February

Beginning cash balance

$10,500

$11,500

Cash received from customers

$11,000

$15,200

Cash on note receivables

$8,500

$0

Cash available

$30,000

$26,700

Payments:



Inventory purchase

$15,600

$14,800

Selling and administrative expenses

$2,900

$2,900

Total cash payments

$18,500

$17,700

Ending cash balance before financing

$11,500

$9,000

Financing:



Borrowing

$0

$1,000

Ending cash balance financing

$11,500

$10,000

02

Preparation of schedule of cash payments


February

Beginning cash balance

$11,500

Cash received from customers

$14,200

Cash on note receivables

$0

Cash available

$25,700

Payments:


Inventory purchase

$14,800

Selling and administrative expenses

$2,900

Total cash payments

$17,700

Ending cash balance before financing

$8,000

Financing:


Borrowing

$2,000

Ending cash balance financing

$10,000

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Most popular questions from this chapter

Question: Preparing a financial budget鈥攕chedule of cash receipts, schedule of cash payments, cash budget

Puckett Company has provided the following budget information for the first quarter of 2018:

Total sales \( 216,000

Budgeted purchases of direct materials 40,600

Budgeted direct labor cost 36,800 Budgeted manufacturing overhead costs:

Variable manufacturing overhead 1,025

Depreciation 1,000

Insurance and property taxes 6,650

Budgeted selling and administrative expenses:

Salaries expense 14,000

Rent expense 2,500

Insurance expense 2,000

Depreciation expense 350

Supplies expense 4,320

Additional data related to the first quarter of 2018 for Puckett Company:

a. Capital expenditures include \)41,000 for new manufacturing equipment to be purchased and paid in the first quarter.

b. Cash receipts are 75% of sales in the quarter of the sale and 25% in the quarter following the sale.

c. Direct materials purchases are paid 50% in the quarter purchased and 50% in the next quarter.

d. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.

e. Income tax expense for the first quarter is projected at \(49,000 and is paid in the quarter incurred.

f. Puckett Company expects to have adequate cash funds and does not anticipate borrowing in the first quarter.

g. The December 31, 2017, balance in Cash is \)25,000, in Accounts Receivable is \(21,600, and in Accounts Payable is \)16,500.

Requirements

1. Prepare Puckett Company鈥檚 schedule of cash receipts from customers and schedule of cash payments for the first quarter of 2018.

2. Prepare Puckett Company鈥檚 cash budget for the first quarter of 2018.

What is the formula used to determine the amount of direct materials to be purchased?

Preparing the financial budget鈥攂udgeted balance sheet

Barker, Inc. has the following balance sheet at December 31, 2018:

Barker projects the following transactions for 2019:

Sales on account, \(20,000

Cash receipts from customers from sales on account, \)17,600

Purchase of raw materials on account, \(7,000

Payments on account, \)3,500

Total cost of completed products, \(16,600, which includes the following:

Raw materials used, \)7,100

Direct labor costs incurred and paid, \(3,900

Manufacturing overhead costs incurred and paid, \)4,800

Depreciation on manufacturing equipment, \(800

Cost of goods sold, \)14,800

Selling and administrative costs incurred and paid, \(500

Purchase of equipment, paid in 2019, \)2,000

Prepare a budgeted balance sheet for Barker, Inc. for December 31, 2019. (Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)

Preparing a financial budget鈥攕chedule of cash payments

Jefferson Company has budgeted purchases of merchandise inventory of \(457,500 in January and \)533,250 in February. Assume Jefferson pays for inventory purchases 70% in the month of purchase and 30% in the month after purchase. The Accounts Payable balance on December 31 is $98,275. Prepare a schedule of cash payments for purchases for January and February.

Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, directing, controlling, coordinating and communicating, and benchmarking.

1. Managers are required to think about future business activities.

2. Managers use feedback to identify corrective action.

3. Managers use results to evaluate employees鈥� performance.

4. Managers work with managers in other divisions.
See all solutions

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