Solved: Carol Moerdyk owner of Carol s Fashion Designs

Inc is planning

Carol Moerdyk, owner of Carol's Fashion Designs, Inc., is planning to request a line of credit
from her bank. She has estimated the following sales forecasts for the firm for parts of 2013 and
2014:

May............................2013............................$180,000

June................................................................180,000

July.................................................................360,000

August.............................................................540,000

September.........................................................720,000

October............................................................360,000

November..........................................................360,000

December...........................................................90,000

January............................2014............................180,000

Collection estimates obtained from the credit and collection department are as follows:
collections within the month of sale, 10 percent; collections during the month following the sale,
75 percent; collections during the second month following the sale, 15 percent. Payments for
labor and raw materials are typically made during the month following the one in which these
costs are incurred. Total labor and raw materials costs are estimated for each month as follows:

May............................2013............................$ 90,000

June.................................................................90,000

July...............................................................126,000

August...........................................................882,000

September.......................................................306,000

October..........................................................234,000

November........................................................162,000

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 December..........................................................90,000

General and administrative salaries will amount to approximately $27,000 per month; lease
payments under long-term lease contracts will be $9,000 per month; depreciation charges will
be $36,000 per month; miscellaneous expenses will amount to $2,700 per month; income tax
payments of $63,000 will be due in both September and December; and a progress payment of
$180,000 on a new design studio must be paid in October. Cash on hand on July 1 will amount
to $132,000, and the firm will maintain a minimum cash balance of $90,000 throughout the cash
budget period.

a. Prepare a monthly cash budget for the last six months of 2013.

b. Estimate the required financing (or excess funds)-that is, the amount of money that Carol will
need to borrow (or will have available to invest)-for each month during that period.

c. Assume that receipts from sales come in uniformly during the month (that is, cash receipts
come in at the rate of one-thirtieth each day), but all outflows are paid on the fifth day of the
month. Will this pattern have an effect on the cash budget-that is, will the cash budget you have
prepared be valid under these assumptions? If not, how can you create a valid estimate of peak
financing requirements? No calculations are required, although calculations can be used to
illustrate the effects.

d. Carol's production follows a seasonal pattern. Without making any calculations, discuss how
the company's current ratio and debt ratio would vary during the year assuming that all financial
requirements were met by shortterm bank loans. Could changes in these ratios affect the firm's
ability to obtain bank credit?

Carol Moerdyk owner of Carol s Fashion Designs Inc is planning

ANSWER
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