Carol Moerdyk, owner of Carol’s Fashion Designs, Inc., is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017:

Collection estimates obtained from the credit and collection department are as follows: collections within the month of sale, 10 percent; collections during the month following the sale, 75 percent; collections during the second month following the sale, 15 percent. Payments for labor and raw materials are typically made during the month following the one in which these costs are incurred. Total labor and raw materials costs are estimated for each month as follows:

General and administrative salaries will amount to approximately $27,000 per month; lease payments under long-term lease contracts will be $9,000 per month; depreciation charges will be $36,000 per month; miscellaneous expenses will amount to $2,700 per month; income tax payments of $63,000 will be due in both September and December; and a progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will amount to
$132,000 and the firm will maintain a minimum cash balance of $90,000 throughout the cash budget period.
a. Prepare a monthly cash budget for the last six months of 2016.
b. Estimate the required financing (or excess funds)—that is, the amount of money that Carol will need to borrow (or will have available to invest)—for each month during that period.
c. Assume that receipts from sales come in uniformly during the month (i.e., cash receipts come in at the rate of one-thirtieth each day), but all outflows are paid on the fifth day of the month. Will this pattern have an effect on the cash budget—that is, will the cash budget you have prepared be valid under these assumptions? If not, how can you create a valid estimate of peak financing requirements? No calculations are required, although calculations can be used to illustrate the effects.
d. Carol’s production follows a seasonal pattern. Without making any calculations, discuss how the company’s current ratio and debt ratio would vary during the year, assuming that all financial requirements were met by short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bankcredit?

  • CreatedNovember 24, 2014
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