UPENN: LOOSE LEAF CORP.FIN W/CONNECT
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Chapter 26, Problem 13QP

a.

Summary Introduction

To prepare: Cash budget of W Incorporation.

Cash Budget:

Cash budget is prepared to ascertain the amount of cash after a given period of time. Cash budget is a statement that contains the information of cash receipts and cash payments.

Closing balance of cash is calculated with the help of cash budget.

a.

Expert Solution
Check Mark

Explanation of Solution

Prepare cash budget.

W Incorporation
Cash budget
($ in millions)

Particulars

 

Q1

($)

millions

Q2

($)

millions

Q3

($)

millions

Q4

($)

millions

Beginning cash balance 32 37.50 13.1 16.7
Net cash inflows 5.5 (24.7) 3.6 25.4
Ending cash balance 37.5 12.8 16.7 42.1
Minimum cash balance (15) (15) (15) (15)
Cumulative surplus (deficit) 22.5 (2.2) 1.7 27.1

Table (1)

Working Note:

The average collection period is of 45 days, it means the cash collection is 50% of current and 50% of old balance of credit sales.

The average accounts payable period is of 36 days it means the firm has to pay 60% of current quarter purchase and 40% of previous quarter purchase in current quarter.

Table that shows calculation of cash inflow and outflow,

Particulars

 

Q1

($)

millions

Q2

($)

millions

Q3

($)

millions

Q4

($)

millions

Beginning receivables 34 52.50 45 61
Sales 105 90 122 140
Collection on account (A) (86.5) (97.50) (106) (131)
Ending receivables 52.5 45 61 70
         
Purchase 41 55 63 54
Payment of accounts 43.5 49.2 59.8 57.6
Wages, taxes and expenses (Sales×30%) 31.5 27 36.60 42
Capital expenditure   40    
Interest and dividend 6 6 6 6
Total cash disbursement (B) 81 122.2 102.4 105.6
Net cash inflows (AB) 5.5 (24.7) 3.6 25.4

Table (2)

Calculate collection on account receivables in Q1,

Cash collection=(Sales×4590)+Beginning receivables=($105 million×4590)+$34 million=$52.5 million+$34 million=$86.5 million

Calculation of ending receivable in Q1,

Ending receivables=Sales×4590=$105 million×4590=$52.5 million

Calculation of purchase of Q1,

Purchase=Sales of Q2×45%=$90 million×45%=41 million

Calculation of payment to accounts payable in Q1,

Payment to accounts=[(Purchase×(9036)90)+(Q1 sales×45%×3690)]=[($41 million×5490)+($105 million×45%×3690)]=[($24.6 million)+($18.9 million)]=$43.5 million

Calculate collection on account receivables in Q2,

Cash collection=Sales×4590+Beginning receivables=$90 million×4590+$52.50 million=$45 million+$52.50 million=$97.5 million

Calculation of ending receivable in Q2,

Ending receivables=Sales×4590=$90 million×4590=$45 million

Calculation of purchase of Q2,

Purchase=Sales of Q3×45%=$122 million×45%=$55million

Calculation of payment to accounts payable in Q2,

Payment to accounts=[(Purchase×(9036)90)+(Q2 sales×45%×3690)]=[($55 million×5490)+($90 million×45%×3690)]=[($33 million)+($16.2 million)]=$49.2 million

Calculate collection on account receivables in Q3,

Cash collection=Sales×4590+Beginning receivables=$122 million×4590+$45 million=$61 million+$45 million=$106 million

Calculation of ending receivable in Q3,

Ending receivables=Sales×4590=$122 million×4590=$61 million

Calculation of purchase of Q3,

Purchase=Sales of Q4×45%=$140 million×45%=$63million

Calculation of payment to accounts payable in Q3,

Payment to accounts=[(Purchase×(9036)90)+(Q3 sales×45%×3690)]=[($63 million×5490)+($122 million×45%×3690)]=[($37.8 million)+($22 million)]=$59.8 million

Calculate collection on account receivables in Q4,

Cash collection=Sales×4590+Beginning receivables=$140 million×4590+$61 million=$70 million+$61 million=$131 million

Calculation of ending receivable in Q4,

Ending receivables=Sales×4590=$140 million×4590=$70 million

Calculation of purchase of Q4,

Purchase=Sales of next quarter×45%=$120 million×45%=$54million

Calculation of payment to accounts payable in Q4,

Payment to accounts=[(Purchase×(9036)90)+(Q3 sales×45%×3690)]=[($54 million×5490)+($140 million×45%×3690)]=[($32.4 million)+($25.2 million)]=$57.6 million

b.

Summary Introduction

To prepare: A statement that shows short term financial plan and the net cash cost.

b.

Expert Solution
Check Mark

Explanation of Solution

The statement of financial plan is,

Particulars

 

Q1

($)

millions

Q2

($)

millions

Q3

($)

millions

Q4

($)

millions

Beginning cash balance 15 15 15 15
Net cash inflows 5.5 (24.7) 3.6 25.4
New short term investment (6.14)   (2.53) (25.45)
Income from short term Investment 0.34 0.46   0.05
Sale of short term investment   22.84    
New short term borrowing   1.1    
Interest on short term borrowing     (0.03)  
Short term borrowing repaid     (1.1)  
Ending cash balance 15 15 15 15
Minimum cash balance (15) (15) (15) (15)
Cumulative surplus (deficit) 0 0 0 0
Beginning short term Investment 17 22.84   2.53
Ending short term Investment 22.84 0 2.53 28.07
Beginning short term debt 0 0 1.1 0
Ending short term debt 0 1.1 0 0

Table (3)

Calculation of net cash cost,

Net cash cost=Income earnedExpenses paid=$0.34+$0.46$0.03+$0.05=$0.82

Working Note:

Calculation of new short term investment in Q1 is,

New short term investment=[Net cash flow (Q1)+(Beginning cash$15 million)×2%]=[$5.80 million+($32 million$15 million)×2%]=[$5.80 million+$0.34 million]=$6.14 million

Calculation of income from new short term investment in Q1 is,

Income=(Beginning cash$15 million)×2%=($32 million$15 million)×2%=$0.34 million

Calculation of beginning short term investment Q1,

Beginning investment=Beginning cash balanceTargent cash balance=$32 million$15 million=$17 million

Calculation of ending short term investment Q1,

Ending investment=Cummulative surplus+Income from short term investment=$22.5 million+$0.34 million=$22.84 million

Calculation of income from new short term investment in Q2 is,

Income=(Income in Q1+Cummulative cash flow)×2%=($0.34 million+$22.50 million)×2%=$0.46 million

Calculation of new short term borrowing Q2,

New short term borrowing=[Cummulative deficit+Q1 income on short term investment+Q2 income on short term investment]=[$1.9 million+$0.34 million+$0.46 million]=$1.1 million

Calculation of new short term investment Q3,

New short term investment= [Net cash inflowQ1 short term borrowing+ Interest on short term borrowing]=$3.6 million$1.1 million+($1.1 million×3%)=$2.5 million+$0.03 million=$2.53 million

Calculation of income from short term investment in Q4,

Income from short term investment=Q3 short term investment×2%=$2.53 million×2%=$0.05 million

Calculation of new short term investment in Q4,

New short term investment=Net cash flows+ Income from investment=$25.4 million+$0.05 million=$25.45 million

Calculation of ending short term investment Q4,

Ending investment=[New short term investment+Beginning short term investment+Income from short term investment]=[$25.45 million+$2.57 million+$0.05 million]=$28.07 million

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