When she returned from her coffee break at 10:30 A.M. on Monday, Mar¬garet Vinson, assistant treasurer of Ellis Printing Company, found a note from Harold Marcus, financial vice president and treasurer, asking her to come down to his office as soon as possible. When Vinson arrived, she found Marcus and Will Wyler, controller of the company, poring over a set of worksheet figures. Vinson quickly learned that because of the tight money situation that was developing in the fall of 2006, Ellis' bank was requesting all of its major loan customers to estimate loan requirements for the remainder of 2006 and the first half of 2007.
Marcus had a luncheon appointment with Robert Knox, the bank loan officer who handled the Ellis account, on the following Thursday-¬three days away. Marcus now wanted Wyler and Vinson to provide him with an estimate of financial requirements for the period in question. Marcus would be leaving on a business trip that same afternoon and would not return until Thursday morning, just before the luncheon ap¬pointment. Wyler was tied up with the final preparation of the firm's federal income tax returns, so he would not be able to contribute much to the forecast. Accordingly, the primary responsibility for the estimate would fall on Margaret Vinson.
At the Monday morning meeting, Marcus, Wyler, and Vinson agreed that what was needed was a cash budget. The firm had, of course, used cash budgets in the past, but one had not been prepared recently, making it necessary to start from scratch. Just as the three were beginning to discuss the mechanics of the actual cash budget preparation, Marcus' secretary came into the office with two messages: First, Marcus had just 45 minutes to drive to the airport to catch his plane, and, second, two CPAs were waiting for Wyler in his office-at $400 an hour each. A few minutes later, Vinson was back at her desk, scratching her head and wondering how to begin the preparation of a cash budget.
On the basis of information already at hand, Vinson decided that no bank borrowing would be required before January. So she decided to restrict the cash budget analysis to the period January 1, 2007 through June 30, 2007.
2006 November $ 25,000
2007 January 50,000.
Ellis Printing Company's credit policy (1/10, net 30) allows a 1 per¬cent discount on cash purchases made within 10 days of the sale. Other¬wise, payment in full is due 30 days from the invoice date. Past experience indicates that 20 percent of the customers will take the discount, 70 per¬cent will pay the next month, and 10 percent will be late, paying the following month (60 days from purchase).
The printing process begins two months before the anticipated de¬livery date. The costs of production consist of materials purchases and labor expenses. These total 60 percent of the forecasted sales, 20 percent for materials, and 40 percent for labor. All materials are purchased 2 months before the sale and delivery of the finished products. Ellis pays 50 percent of the invoice in the month it receives the materials (i.e., the second month prior to the sale), and the balance in the following month. Labor expenses are incurred according to
a similar schedule-50 percent incurred and paid for 2 months before the sale, 50 percent the next month.
General and administrative salaries amount to $8,000 a month. The current lease agreement calls for $3,000 per month and will not expire until December 31, 2007. Fixed assets are depreciated at $4,000 monthly and miscellaneous expenses are estimated at $2,500 a month. The out¬standing bonds have a 10 percent coupon paid semiannually in January and July. Also, in June Ellis expects to replace an old machine with a $50,000 purchase of equipment. The old machine will have no salvage or book value. Taxes are estimated at $7,500 quarterly, paid in Decem¬ber, April, June, and September. The minimum desired cash balance is $30,000, which the company will have on hand, as shown in Table 1.
ELLIS PRINTING COMPANY BALANCE SHEET DECEMBER 31. 2006
CasAssets Claims on Assets
Cash $ 30,000 Accounts payable $ 9,500
Liquid assets 46,000 Bank loans 20,000
Accounts receivable 22.000 Current liabilities $ 29,500
Inventory 77,000 Bonds (10%, 20 years) $100,000
Fixed assets (net)
250,000 Retained earnings 195,500
Total assets $425,000 Total claims on assets $425,000
1. Prepare Ellis Printing Company's cash budget for the first half of 2007.
2. Estimate the required financing (or surplus funds) for each month during the budget period. Ellis has a $50,000 line of credit established with its bank Will this amount be sufficient to cover the fore-casted deficits? Suppose Ellis discovers that it must obtain funds elsewhere. Where might you suggest they seek alternative financing?
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