Solved: Patricia Smith recently leased space in the

Southside Mall and

Patricia Smith recently leased space in the Southside Mall and opened a new business,
Smith’s Coin Shop. Business has been good, but Smith frequently runs out of cash. This
shortcoming has necessitated late payment on certain orders, which in turn is beginning to
cause a problem with suppliers. Smith plans to borrow from the bank to have cash ready as
needed, but first she needs to forecast how much she must borrow. Accordingly, she has asked
you to prepare a cash budget for the critical period around Christmas, when the business needs
will be especially high. Sales are made on a cash basis only. Smith’s purchases of materials
must be paid for during the month following the purchases. Smith pays herself a salary of
$4,800 per month, and the store’s rent is $2,000 per month. In addition, Smith must make a tax
payment of $12,000 in December. The current cash on hand (on December 1) is $400, but
Smith has agreed to maintain an average bank balance of $6,000—this amount is her target
cash balance. (Disregard till cash, which is insignificant because Smith keeps only a small
amount on hand to lessen the chances of robbery.) The firm’s estimated sales and purchases
for December, January, and February are shown in the following table. Purchases during
November amounted to $140,000.

a. Prepare a cash budget for December, January, and February.

b. Suppose that Smith started selling on a credit basis on December 1, giving customers 30
days to pay; all customers accept these terms (paying 30 days after purchases); and all other
facts in the problem remain unchanged. What would the company’s loan requirements be at
the end of February in thiscase?

Patricia Smith recently leased space in the Southside Mall and

ANSWER
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