FIN 370 4-6A. (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of
2004 4-6A. (Cash budget) The Sharpe Corporation’s projected sales for the first eight months of 2004 are
as follows:
January $ 90,000
February $ 120,000
March $ 135,000
April $ 240,000
May $300,000
June $ 270,000
July $ 225,000
August $ 150,000
Of Sharpe’s sales, 10 percent is for cash, another 60 percent is collected in the month following sale,
and 30 percent is collected in the second month following sale. November and December sales for
2003 were $220,000 and $175,000, respectively.
Sharpe purchases its raw materials two months in advance of its sales equal to 60 percent of their
final sales price. The supplier is paid one month after it makes delivery. For example, purchases for
April sales are made in February and payment is made in March. In addition, 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.
The company’s cash balance at December 31, 2003, was $22,000; a minimum balance of $15,000
must be maintained at all times. Assume that any short-term financing needed to maintain the cash
balance is paid off in the month following the month of financing if sufficient funds are available.
Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash
needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to
have a need for an additional $60,500, these funds would be borrowed at the beginning of April
with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.
a. Prepare a cash budget for Sharpe covering the first seven months of 2004.
b. Sharpe has $200,000 in notes payable due in July that must be repaid or renegotiated for an
extension. Will the firm have ample cash to repay the notes?
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