Question

Peter Corporation sells its products to a single customer. At the beginning of the current quarter, the company reports the following selected account balances:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000
Accounts receivable . . . . . . . . . . . . . . . 250,000
Current payables . . . . . . . . . . . . . . . . . . . . . 90,000

Peter’s management has made the following budget estimates regarding operations for the current quarter:
Sales (estimated) . . . . . . . . . . . . . . . . . . . . . . . . . . $700,000
Total costs and expenses (estimated) . . . . . . . . . . . 500,000
Debt service payment (estimated) . . . . . . . . . . . . . 260,000
Tax liability payment (estimated) . . . . . . . . . . . . . . 50,000
Of Peter’s total costs and expenses, $40,000 is quarterly depreciation expense, and $18,000 rep-resents the expiration of prepayments. The remaining $442,000 is to be financed with current payables. The company’s ending prepayments balance is expected to be the same as its beginning prepayments balance. Its ending current payables balance is expected to be $15,000 more than its beginning balance.
All of Peter’s sales are on account. Approximately 70 percent of its sales are collected in the quarter in which they are made. The remaining 30 percent are collected in the following quarter.
Because all of the company’s sales are made to a single customer, it experiences virtually no uncollectible accounts.
Peter’s minimum cash balance requirement is $10,000. Should the balance fall below this amount, management negotiates a short-term loan with a local bank. The company’s debt ratio (liabilities ÷ assets) is currently 90 percent.

Instructions
a. Compute Peter’s budgeted cash receipts for the quarter.
b. Compute Peter’s payments of current payables budgeted for the quarter.
c. Compute Peter’s cash prepayments budgeted for the quarter.
d. Prepare Peter’s cash budget for the quarter.
e. Estimate Peter’s short-term borrowing requirements for the quarter.
f. Discuss problems Peter might encounter in obtaining short-term financing.



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  • CreatedApril 17, 2014
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