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Unformatted text preview: 81 CHAPTER 3: THE CASH BUDGET Solution 4. You were recently hired to improve the financial condition of Idaho Springs Hardware, a small chain of three hardware stores in Colorado. On your first day the owner, Chuck Vitaska, told you that the biggest problem facing the firm has been periodic unexpected cash shortages that have made it necessary for him to delay wage payments to his employees. Having recently received a degree in finance, you immediately realize that your first priority is to develop a cash budget and to arrange for a short-term borrowing agreement with the firms bank. After looking at the firms past financial records, you developed a sales forecast for the remainder of the year, as is presented in the following table. Month Sales June 2010 $62,000 July 73,000 August 76,000 September 70,000 October 59,000 November 47,000 December 41,000 In addition to the seasonality of sales, you have observed several other patterns. Individuals account for 40% of the firms sales, and they pay in cash. The other 60% of sales are to contractors with credit accounts, and they have up to 60 days to pay. As a result, about 20% of sales to contractors are paid one month after the sale, and the other 80% is paid two months after the sale. Each month the firm purchases inventory equal to about 45% of the following months sales. About 30% of this inventory is paid for in the month of delivery, while the remaining 70% is paid one month later. Each month the company pays its hourly employees a total of $9,000, including benefits. Its salaried employees are paid $12,000, also including benefits. In the past, the company had to borrow to build its stores and for the initial inventories. This debt has resulted in monthly interest payments of $4,000 and monthly principal payments of $221. On average, maintenance at the stores is expected to cost about $700 per month, except in the October to December period when...
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- Fall '09