Data Table January 9, 10,000; May 29, 9700; February 11, 940

Data Tablejanuary91000may299700february119400june270

Analyze the preparation of a comprehensive cash budget for Sharpe Corporation based on projected sales, collections, purchases, expenses, and financing needs spanning the first eight months of 2011. The prompt involves calculating cash inflows from sales, cash outflows from purchases, expenses, and tax prepayments, as well as managing short-term financing requirements to maintain minimum cash balances and prepare a specific cash budget for the initial seven months of 2011, including an assessment of the company's ability to meet its notes payable due in July.

Paper For Above instruction

The development of an effective cash budget is fundamental for a company's financial planning, especially when dealing with fluctuating sales, receivables, and payment obligations. For Sharpe Corporation, understanding cash flow dynamics over the first eight months of 2011 is vital for ensuring liquidity while managing its short-term financing needs. The available data provides sales forecasts, collection patterns, purchase schedules, and expense obligations, which collectively inform the cash budgeting process.

Introduction

The core objective of this analysis is to construct a detailed monthly cash budget for Sharpe Corporation, considering collection and payment cycles, expenses, and its minimum cash balance requirement. This involves calculating the timing and magnitude of cash inflows and outflows, determining cash shortfalls or surpluses, and identifying the company's financing needs. Additionally, the analysis evaluates whether Sharpe will have sufficient cash to meet a significant debt obligation of $200,700 due in July.

Sales and Cash Collection Patterns

Sharpe's sales are projected monthly, with 10% collected in cash immediately, 60% collected in the subsequent month, and 30% collected two months after the sale. These patterns are standard in industries with receivables, illustrating the importance of tracking sales not only in the reporting month but also in the months following to accurately forecast cash inflows.

For example, in January 2011, sales are projected at $91,000. The cash received from January sales includes 10% cash sales ($9,100), 60% collected in February ($54,600), and 30% in March ($27,300). Similarly, sales in February and March follow this collection pattern, enabling precise calculations of cash receipts for each subsequent month.

Purchases and Payments Schedule

Purchases are made two months prior to a sale based on 60% of the sales value, with payment made one month after delivery. This schedule results in confirmed accounts payable that influence future cash disbursements. For instance, purchasing materials for April sales occurs in February, with payments made in March. Accurately forecasting these payments involves identifying the purchase amounts from sales data and timing of payments.

Expenses and Tax Prepayments

The company incurs fixed monthly expenses for rent, totaling $9,000, and other expenditures, totaling $20,900. Tax prepayments are scheduled quarterly at $22,700, beginning in March. These expenses must be incorporated into the cash disbursement calculations to ensure an accurate depiction of cash outflows for each month.

Minimum Cash Balance and Short-term Borrowing

Sharpe aims to maintain a minimum cash balance of $15,000 at all times. When projected cash inflows are insufficient to cover outflows, the company must borrow to fill the gap. Borrowings occur at the beginning of the month, and repayments are made in subsequent months when excess cash becomes available. The interest rate on short-term loans is 11% per annum, paid monthly. Calculating interest involves applying the monthly rate (approximately 0.9167%) to borrowed amounts.

Constructing the Cash Budget

The construction of the cash budget begins by calculating the expected cash inflows derived from sales collections, followed by cash outflows related to purchases, expenses, tax prepayments, and interest payments on borrowings. For each month, the net change in cash is computed, alongside the ending cash balance. When cash deficits are projected, short-term borrowing is initiated to sustain the minimum cash balance, and the borrowings' cumulative effects are tracked.

Assessing the July Notes Payable

Sharpe has $200,700 in notes payable due in July. To determine whether the company can meet this obligation, the July cash budget is examined for any projected cash surpluses or deficits. If the cash balance at the end of June is adequate, with sufficient liquidity from existing cash reserves or short-term borrowing, the notes can be repaid or renegotiated accordingly.

This assessment hinges on the accuracy of previous months' cash flow forecasts, highlighting the importance of detailed and precise budgeting for effective financial management.

Conclusion

Comepletion of this cash budget allows Sharpe Corporation to visualize its monthly cash positions, identify potential shortfalls, and strategize borrowing or expense adjustments. Moreover, understanding the timing and magnitude of cash flows supports informed decisions about debt repayment, investment, and operational planning. Proper management of short-term liquidity ensures the company's financial stability and operational continuity, particularly when facing significant debt obligations such as the July notes payable.

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