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    16-10 CASH BUDGETING Helen Bowers, Owner of Helen's Fashion Designs, Is

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    Jarold Matias
    Helen Bowers plans to request a line of credit from her bank to fund her fashion design business. The summary provides sales forecasts and estimated costs for labor, materials, salaries, expenses, and taxes for the last six months of 2015. It also notes the company's cash on hand and minimum cash balance requirements. Preparing accurate cash budgets and financing estimates is important given the company's seasonal sales and production cycles, which could impact its current and debt ratios and ability to obtain future bank loans.

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    16-10 CASH BUDGETING Helen Bowers, Owner of Helen's Fashion Designs, Is

    Uploaded by

    Jarold Matias
    99 views4 pages
    Helen Bowers plans to request a line of credit from her bank to fund her fashion design business. The summary provides sales forecasts and estimated costs for labor, materials, salaries, expenses, and taxes for the last six months of 2015. It also notes the company's cash on hand and minimum cash balance requirements. Preparing accurate cash budgets and financing estimates is important given the company's seasonal sales and production cycles, which could impact its current and debt ratios and ability to obtain future bank loans.

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    Helen Bowers plans to request a line of credit from her bank to fund her fashion design business. The summary provides sales forecasts and estimated costs for labor, materials, salaries, expenses, and taxes for the last six months of 2015. It also notes the company's cash on hand and minimum cash balance requirements. Preparing accurate cash budgets and financing estimates is important given the company's seasonal sales and production cycles, which could impact its current and debt ratios and ability to obtain future bank loans.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    99 views4 pages

    16-10 CASH BUDGETING Helen Bowers, Owner of Helen's Fashion Designs, Is

    Uploaded by

    Jarold Matias
    Helen Bowers plans to request a line of credit from her bank to fund her fashion design business. The summary provides sales forecasts and estimated costs for labor, materials, salaries, expenses, and taxes for the last six months of 2015. It also notes the company's cash on hand and minimum cash balance requirements. Preparing accurate cash budgets and financing estimates is important given the company's seasonal sales and production cycles, which could impact its current and debt ratios and ability to obtain future bank loans.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    16-10 CASH BUDGETING Helen Bowers, owner of Helen’s Fashion Designs, is

    planning to request a line of credit from her bank. She has estimated the following sales
    forecasts for the firm for parts of 2015 and 2016:

    Estimates regarding payments obtained from the credit department are as follows:
    collected within the month of sale, 10%; collected the month following the sale, 75%;
    collected the second month following the sale, 15%. Payments for labor and raw materials
    are made the month after these services were provided. Here are the estimated costs of
    labor plus raw materials:

    General and administrative salaries are approximately $27,000 a month. Lease payments
    under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month.
    Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due in

    This study source was downloaded by 100000810618318 from CourseHero.com on 02-06-2022 03:28:21 GMT -06:00

    https://www.coursehero.com/file/77746629/431599402-Supplimentary-Question1docx/
    September and December. A progress payment of $180,000 on a new design studio must be
    paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of
    $90,000 should be maintained throughout the cash budget period.
    a. Prepare a monthly cash budget for the last 6 months of 2015.

    This study source was downloaded by 100000810618318 from CourseHero.com on 02-06-2022 03:28:21 GMT -06:00

    https://www.coursehero.com/file/77746629/431599402-Supplimentary-Question1docx/
    b. Prepare monthly estimates of the required financing or excess funds—that is, the
    amount of money Bowers will need to borrow or will have available to invest.

    15%

    Total Cash
    Received in
    Month 18000 153000 198000 351000 531000 657000 414000 333000

    c. Now suppose receipts from sales come in uniformly during the month (that is,
    cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th.
    Will this affect the cash budget? That is, will the cash budget you prepared be valid under
    these assumptions? If not, what could be done to make a valid estimate of the peak
    financing requirements? No calculations are required, although if you prefer, you can use
    calculations to illustrate the effects.

    The assumption made with regard to the above prepared budget is that all inflow
    & outflows are occurring uniformly throughout the month. However, in this case, there
    will be a cash flow mismatch since payments need to be paid on 5th of the month while
    inflows will come uniformly during the month. For this reason, there is need for the
    company to take the short- term finance facility from the bank. The company will have to
    take a finance of total outflow amount in the first month i.e. 5 days receipts of cash in
    that month. This amount can then be repaid by the end of the month. In this way the
    estimate of cash budget can be prepared.

    d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just
    ahead of sales. Without making any calculations, discuss how the company’s
    current and debt ratios would vary during the year if all financial requirements were
    met with short-term bank loans. Could changes in these ratios affect the firm’s
    ability to obtain bank credit? Explain.

    The company will continue to produce goods during the off season. Secondly, the
    short-term bank loan will increase the company’s debt ratio. Thirdly, because of increase
    in production there will be an increase in stock. This will in turn result in the increase in
    current assets thereby increasing the current ratio of the company.
    Because of seasonal sales, there will be a mismatch in the company’s working
    capital. On overall the credit position of the company will remain the same. However, it
    will only be able to obtain short term loans but not long term ones.

    This study source was downloaded by 100000810618318 from CourseHero.com on 02-06-2022 03:28:21 GMT -06:00

    https://www.coursehero.com/file/77746629/431599402-Supplimentary-Question1docx/
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    This study source was downloaded by 100000810618318 from CourseHero.com on 02-06-2022 03:28:21 GMT -06:00

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