Question

John Wills, Swifty & Hill Fabricators’ budget director, has received budget information from several managers and is preparing the company’s cash budget.

		January			February			March			Quarter
Collections from sales		303,405			550,875			587,100			1,441,380
Payments for direct materials		45,470			67,800			80,180			193,450
Payments for direct labor		125,430			215,830			190,970			532,230
Payments for manufacturing overheads		97,615			100,779			99,909			298,303
Payments for Selling & administrative expenses		58,195			74,300			70,910			203,405

In addition to the information he received from these managers, John knows the following:

●		Bates & Hill plans to have $67,800 in its cash account on January 1.
●		Bates & Hill plans to declare and pay dividends totaling $55,300 in January.
●		Bates & Hill plans to purchase and pay cash for a piece of land in February at a cost of $81,360.
●		Bates & Hill plans to make a cash purchase of equipment in March at a cost of $67,800.
●		Bates & Hill’s income taxes from last quarter totaling $85,040 will be paid in January.
●		Bates & Hill is required to maintain a minimum cash balance of $33,900 in its account at First National Bank.

Swifty & Hill has negotiated with the First National Bank to provide a $198,000 line of credit that can be borrowed against in $1,000 increments on the first day of the month. Any repayments on the line of credit must also be made in $1,000 increments and are made on the last day of the month when cash is available. The annual interest rate on this line of credit is 14%. Any time a principal payment is made, all accrued interest to date is repaid. Prepare Swifty & Hill’s cash budget for the first quarter

Answer 1

Cash budget for the First Quarter
	January	February	March	Quarter
Cash Receipts
Opening Balance	67800	195	11001
Collections from sales	3,03,405	5,50,875	5,87,100	1441380
Borrowing from Bank	11000
Total Cash receipts	382205	551070	598101	1441380
Cash payments
Dividends	55300			55300
Payments for direct materials	45,470	67,800	80,180	193450
Payments for direct labor	1,25,430	2,15,830	1,90,970	532230
Payments for manufacturing overheads	97,615	1,00,779	99,909	298303
Payments for Selling & administrative expenses	58,195	74,300	70,910	203405
Purchase of Land		81360		81360
Purchase of Equipment			67800	67800
Repayment of Borrowing			11000	11000
Repayment of Interest on Borrowing			385	385	Note 1
Total Cash payments	382010	540069	521154	1443233
Cash balance - Excess / ( Deficit )	195	11001	87948	86095

Note 1 - Calculation of Interest on Borrowing
There was a shortfall of $ 10805 at the end of January
Since the Borrowing can be done in the Intervals of $ 1000 each, the Company
borrowed $ 11000 in January
The Company had $ 11000 at the end of February but as required in the question
the Company has to pay the Interest also , alongwith the Principal in the same month
but the Company did not have enough funds to pay the principal , as well as Interest
The repayment could be possible in March only
Moreover, the Interest shall be paid on the Limit Utilized .
As per the condition the borrowing can be done at the beginning			of the month ,	Hence	3 months Interest to be charged
Hence, the Interest @ 14% per annum shall be charged on 11000 for 3 months
Interest on Loan = 11000* 14% * 3/12	=	385