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Q. 17E

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Financial & Managerial Accounting
Found in: Page 918
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Kayak Co. budgeted the following cash receipts (excluding cash receipts from loans received) and cash payments (excluding cash payments for loan principal and interest payments) for the first three months of next year.

According to a credit agreement with the company’s bank, Kayak promises to have a minimum cash balance of $30,000 at each month-end. In return, the bank has agreed that the company can borrow up to $150,000 at a monthly interest rate of 1%, paid on the last day of each month. The interest is computed based on the beginning balance of the loan for the month. The company repays loan principal with any cash in excess of $30,000 on the last day of each month. The company has a cash balance of $30,000 and a loan balance of $60,000 at January 1. Prepare monthly cash budgets for January, February, and March.

The ending cash balance for the month of January, February and March will be $30,000, $69,294 and $30,000.

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Step by Step Solution

Step 1: Introduction

The cash budget of an organization defines the total cash receipts and cash payments made towards the business transactions.

Step 2: Monthly cash budget

Kayak Co.
Cash budget
For the month of January, February and March

Particulars

January

February

March

Beginning cash balance

$30,000

$30,000

$69,294

Add: Cash receipts

$525,000

$400,000

$450,000

Total cash available

$555,000

$430,000

$519,294

Less: Cash payments

$475,000

$350,000

$525,000

Less: Interest expense

$600

$106

$0

Preliminary cash balance

$79,400

$79,894

-$5,706

Less: Additional loan

-$49,400

-$10,600

$35,706

Ending cash balance

$30,000

$69,294

$30,000

Most popular questions for Business-studies Textbooks

Question: Aztec Company sells its product for $180 per unit. Its actual and budgeted sales follow

All sales are on credit. Recent experience shows that 20% of credit sales is collected in the month of the sale, 50% in the month after the sale, 28% in the second month after the sale, and 2% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 100 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,320,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $100,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $100,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 12% interest rate. On May 31, the loan balance is $25,000, and the company’s cash balance is $100,000. (Round amounts to the nearest dollar.)

Required

1. Prepare a schedule that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.

2. Prepare a schedule that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.

3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.

4. Prepare a schedule showing the computation of cash payments for product purchases for June and July.

5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Analysis Component

6. Refer to your answer to part 5. The cash budget indicates the company will need to borrow more than $18,000 in June. Suggest some reasons that knowing this information in May would be helpful to management.

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