Question

Given the following information, how much of a line of credit is appropriate? (Jackie's Toy Manufacturer – 2005 Cash Budget for SEPT – NOV in $1,000,000s). Thirty percent of sales are for cash and the balance is collected the month following the sales. Seventy percent of the purchases are for cash and the balance is paid the month following the purchase. The required balance is 50.

Sales                                        400      500      800      1,000  

Purchases                                250      375      500      600                

                                                 AUG   SEPT   OCT   NOV  

Cash Inflows:                         x         

Cash Sales                               x           150       240       300   

Collect AR                              x          280      350 560

Other                                       x          70        80      1,500

Total Cash Inflows                            500      670     2,360

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Cash Outflows:                      x

Cash Purchases                       x         262.5    350       420

Pay AP                                    x          75.1 12.5 150

Other                                       x          140       150      155

Asset Purchase                                     500      x          x

Total Cash Outflows                       977.5      712.5 ___ (FILL IN)

NET CASH FLOW                        -477.5     -42.5 ___ (FILL IN)

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Beg Bal.                                               50 -427.5 _______(FILL IN)

End Bal. -427.5 -470.0 ___ (FILL IN)

R_________                                       ___      ___      ___ (FILL IN)

                                   

Surp(Loan)    ______-477.50_______________________________________  

22. What is the Net Cash Flow for NOVEMBER?  a. $2,013 b. $725 c. -50 d. None

23. What is the size of loan Jackie’s Toy Company needs? RULE is Largest Negative Balance is the Loan required. a. $520.0   b. $477.5   c. $570.0    d. None

Answer 1

(a) Calculating the cash outflows in November, cash outflows is the sum of cash purchases, AP paid and others. Hence, in November, cash outflows are $725.

Net Cash Flow is the difference between total cash inflows and total cash outflows.

Hence, net cash flow in November is $1,635. Option (d) is the correct choice.

(b) For November, beginning balance is the balance at the end of the month of October. Hence, the beginning balance is -$470. Given net cash inflows is $1,635 for the month of November, balance at the end of the month of November is -$470+$1,635=$1,165. Clearly, largest negative balance is at the end of the month of October as -$470, and the required balance is $50. Hence, the size of loan required is $50-(-$470)=$520. Option (a) is correct choice.