Question

Budgeting

XYZ Corporation is preparing a cash budget for the first two months of the coming year. The following data have been forecasted:

	January			February
Sales	$	750,000		$	800,000
Purchases		450,000			480,000
Operating expenses:
Payroll		146,800			167,400
Advertising		52,700			62,800
Rent		8,750			8,750
Depreciation		23,750			23,750
End-of-January balances:
Cash		120,000
Bank loan		480,000

Additional data:

Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The collection pattern for credit sales is 80% in the month following the month of sale (of which 75% are collected within 10 days), and 20% in the month thereafter. Total sales in December of the prior year were $1,000,000.

Purchases are all on credit, with 40% paid in the month of purchase and the balance the following month.

Operating expenses are paid in the month incurred.

The firm desires to maintain a minimum cash balance of $150,000 at the end of each month.

Loans are used to maintain the minimum cash balance. At the end of each month, interest of 1% per month is paid on the outstanding loan balance as of the beginning of the month. Repayments are made (at the end of the month) whenever the cash balance exceeds $150,000.

Required:

1. Prepare the cash budget, in the form of a statement of cash flow, for February.
2. What is the amount of the loan balance at the end of the month (after loan repayments, if any)?

Answer 1