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Q34E

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Found in: Page 1238

### Horngren'S Financial And Managerial Accounting

Book edition 6th
Author(s) Tracie L. Miller-Nobles, Brenda L. Mattison
Pages 992 pages
ISBN 9780134486833

# Preparing a financial budget—cash budget, sensitivity analysis Leichter Auto Parts, a family-owned auto parts store, began January with $10,500 cash. Management forecasts that collections from credit customers will be$11,000 in January and $15,200 in February. The store is scheduled to receive$8,500 cash on a business note receivable in January. Projected cash payments include inventory purchases ($15,600 in January and$14,800 in February) and selling and administrative expenses ($2,900 each month). Leichter Auto Part's bank requires a$10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below $10,000, the bank automatically extends credit to the store in multiples of$1,000. Leichter Auto Parts borrows as little as possible and pays back loans in quarterly installments of $2,000, plus 4% APR interest on the entire unpaid principal. The first payment occurs three months after the loan. Requirements 1. Prepare Leichter Auto Part's cash budget for January and February.2. How much cash will Leichter Auto Parts borrow in February if collections from customers that month total$14,200 instead of $15,200? Answer Leichter Auto Parts will borrow$ 2,000 in February if the collection from the customer is $14,200 instead of$ 15,200 that month.

See the step by step solution

## Step 1: Sensitivity analysis

 January February Beginning cash balance $10,500$11,500 Cash received from customers $11,000$15,200 Cash on note receivables $8,500$0 Cash available $30,000$26,700 Payments: Inventory purchase $15,600$14,800 Selling and administrative expenses $2,900$2,900 Total cash payments $18,500$17,700 Ending cash balance before financing $11,500$9,000 Financing: Borrowing $0$1,000 Ending cash balance financing $11,500$10,000

## Step 2: Preparation of schedule of cash payments

 February Beginning cash balance $11,500 Cash received from customers$14,200 Cash on note receivables $0 Cash available$25,700 Payments: Inventory purchase $14,800 Selling and administrative expenses$2,900 Total cash payments $17,700 Ending cash balance before financing$8,000 Financing: Borrowing $2,000 Ending cash balance financing$10,000