Create for the cash budget: Sharpe Corporation’s proposed sales for first 8 months of 2011 are given below:
January $190,000 May $300,000
February $120,000 June 270,000
March 135,000 July 225,000
April 240,000 August 150,000
Of Sharpe’s sales 10% is for cash, another 60%is collected in month following sale, and 30% is collected in second following the sale. November and December sales for 2010 were $220,000 and $175,000, respectively.
Sharpe buys its raw material two months in advance of its sales. Purchases are equal to 60% of final sales price of Sharpe’s products.. Supplier is paid 1 month after it makes delivery. For instance, purchases for April sales are made in February and payment is made in March. Additionally, Sharpe pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter, beginning in March.
Company’s cash balance at December 31, 2010 was $22,000. This is the minimum balance firm wishes to sustain. Any borrowing which is required to preserve this minimum is paid off in subsequent month if there is enough cash. Interest on short-term loans (12%) is paid monthly. Borrowing to meet estimated monthly cash requires take place at the beginning of month. Hence, if in month of April firm expects to have the requirement for the extra $60,500, these funds would be borrowed at beginning of April with interest of $605 (0.12 x 1/12 x $60.500) owed for April being paid at the beginning of May.
a) Create the cash budget for Sharpe covering the first seven months of 2011.
b) Sharpe has $200,000 in notes payable due July which should be repaid or renegotiated for the extension. Will the firm have enough cash to repay notes?