Question

Franklin Medical Clinic has budgeted the following cash flows:

	January			February			March
Cash receipts	$	107,000		$	113,000		$	133,000
Cash payments
For inventory purchases		93,500			75,500			88,500
For S&A expenses		34,500			35,500			30,500

Franklin Medical had a cash balance of $11,500 on January 1. The company desires to maintain a cash cushion of $6,000. Funds are assumed to be borrowed, in increments of $1,000, and repaid on the last day of each month; the interest rate is 2 percent per month. Repayments may be made in any amount available. Franklin pays its vendors on the last day of the month also. The company had a monthly $40,000 beginning balance in its line of credit liability account from this year’s quarterly results.

Required

Prepare a cash budget. (Round intermediate and final answers to the nearest whole dollar amounts. Any repayments/shortage should be indicated with a minus sign. )

Cash Budget	January	February	March
Cash available
Less: Cash payments
Total budgeted payments
Payments minus receipts
Financing Activity

Answer 1

In January month there is cash deficiency of $10,300 so to maintain required cash cushion they have to borrow $10,300+$6,000 = $16,300 but it can borrow multiple of $1,000 so borrowing rounded to $17,000.

In February month, available cash is $7,560 but due to minimum cash cushion requirement of $6,000, they can repay loan to extent of only $7,560-$6,000= $1,560.

In March month, available cash is $18,891but due to minimum cash cushion requirement of $6,000, it can repay loan to the extent of $18,891-$6,000= $12,891.