Question

Preparing a financial budget

This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).

Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.

Requirements

1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.

2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?

Short answer

Leichter Auto Parts will not borrow any amount in February if collections from customers that month total $41,000 instead of $51,000.

Step-by-step solution

Preparation of schedule of cash payments 

	January	February
Beginning cash balance	$15,000	$41,000
ADD: Cash received from customers	$48,000	$51,000
Cash available	$63,000	$92,000
LESS: Payments:
Inventory purchase	$20,000	$41,000
Selling and administrative expenses	$2,000	$2,000
Total cash payments	$22,000	$43,000
Ending cash balance before financing	$41,000	$49,000
Financing:
Borrowing	$0	$0
Ending cash balance financing	$41,000	$43,000

Sensitivity analysis

	February
Beginning cash balance	$41,000
ADD: Cash received from customers	$41,000
Cash available	$82,000
LESS: Payments:
Inventory purchase	$41,000
Selling and administrative expenses	$2,000
Total cash payments	$43,000
Ending cash balance before financing	$39,000
Financing:
Borrowing	$0
Ending cash balance financing	$39,000