Practice question from different books Short term financial planning Solution/:- Average = (Opening + Ending) / 2 Operating Cycle = Inventory Period + A/R period = 64.15 + 28.61 = 92.76 Cash Cycle= Operating Cycle A/P period = 92.76 50.28 = 42.48 Solution/:- For 45 days:- Particulars Opening Ending Average Inventory 8,413 10,158 9286 Debtors/Account Receivables 5,108 5,439 5274 Creditors/Account Payables 6,927 7,625 7276 Net Sales 67,312 Cost of Sale or Cost of Goods Sold 52,827 Ratios Calculation:- Inventory Turnover = Cost of Sale / Average inventory 5.69 Inventory Period = 365 days / Inventory Turnover 64.15 Debtors or A/R Turnover = Credit Sales / Avg A/R 12.76 Receivable Period = 365 days / A/R Turnover 28.61 Payable Turnover = Cost of Sale / Avg. Payable 7.26 Payable Period = 365 days / A/P Turnover 50.28 Particulars Q1 Q2 Q3 Q4 Beginning Receivables 300 400 380 470 Sales 800 760 940 870 Cash Collection 700 780 850 905 Ending Receivables 400 380 470 435 (90 45)/90 = ½ =.5 of current sales are collected Cash Collection = (.5 of Sales * amount of sales) + Beginning receivable 1
= (.5 * 800) + 300 = 400 + 300 = 700 Ending Receivables = Sales + Beginning Receivable Cash collection = 800 + 300 700 = 400 For 60 days:- (90 60) / 90 =.3333 Cash Collection = (.3333 of Sales * amount of sales) + Beginning receivable = (.3333 * 800) + 300 = 267 + 300 = 567 Ending Receivables = Sales + Beginning Receivable Cash collection = 800 + 300 567 = 533 Particulars Q1 Q2 Q3 Q4 For 30 days:- (90 30) / 90 =.6666 Beginning Receivables 300 533 507 627 Sales 800 760 940 870 Cash Collection 567 786 820 917 Ending Receivables 533 507 627 580 Particulars Q1 Q2 Q3 Q4 Beginning Receivables 300 267 253 313 Sales 800 760 940 870 Cash Collection 833 773 880 893 Ending Receivables 267 253 313 290 Cash Budget The cash budget is a primary tool in short-run financial planning. It allows the financial manager to identify short-term financial needs and opportunities. An important function of the cash budget is to help the manager explore the need for short-term borrowing. The idea of the cash budget is simple: It records estimates of cash receipts (cash in) and disbursement (cash out). The result is an estimate of the cash surplus or deficit. 2
Solution/:- Cash Budget for the Month of April Inflows Particulars Balance at Beginning Collection from Sales (Budgeted*20%) Collection from Debtors Amount 30,000 170,000*20% =34,000 24,000+36,000+54,400 =114,400 Total Inflows =178,400 Outflows Payment for Purchases March (100,000*2%Discount) 49,000 April (Rs 29,400 1/2) (see purchase budget) 14,700 Selling, general and administrative expenses (Rs 45,000 35,000 Rs 10,000) Total outflows =98,700 Cash Budget Balance at the end of April 79,700 Working Cash at the end of March is beginning for April. As the firm make Cash sales of 20% so Cash Sales are 170,000*20% = 34,000 For the Month of February 120,000*20% = 24,000 120,000 24,000 = 96,000 96,000*25% = 24,000 Collection of Credit Sales For the Month of March 150,000*20% = 30,000 150,000 30,000 = 120,000 120,000*30% = 36,000 For the Month of April 170,000*20%= 34,000 170,000 34,000 = 136,000 136,000*40% = 54,400 We are working on March and April for Outflows because in Part (b) it is mentioned that (following month s budgeted sales) means the month which is following the budgeted sales. So the month of March has actual sales and following is April. 3
Purchases for March=100,000 Discount = 2% (part c) Purchases for maintaining inventory level at each month = ½ So for Outflow for March Discount = 100,000*2% = 2000 Remaining = 100,000 2000 = 98,000 For remaining, we maintain inventory at ½ 98,000*1/2= 49,000 Purchased Budget for April Desired ending inventory Add: Cost of sales in April Total requirements Less: Beginning inventory Gross 1,75,000 85,000 2,60,000 2,30,000 Net 1,71,500 83,300 2,54,800 2,25,400 Required purchases 30,000 29,400 Desired Ending Inventory = May Budgeted sales i.e. 140,000*.50*2.5=175,000 VU instructor Guidelines Note: - (b) The firm has a policy of buying enough goods each month to maintain its inventory at two and one-half times the following month s budgeted sales. So 2 and one half times = 2.5 Cost of sales (means purchasing price of inventory) is 50% of sales price. it is mentioned that company records its inventory after netting of the discount which is 2% so, Desired ending inventory-net = 175,000*0.02 =3500 = 175000 3500 = Rs. 171,500 Cost of sales- gross = 170,000*0.5 = Rs. 85,000 and after deducting discounts, net cost of sales = Rs. 83,300 Beginning inventory (net) is already mentioned in question requirement, which is Rs. 225,400. (Note: Gross inventory is not needed to calculate, however, concept of gross inventory calculation is to add back 2% discount). So gross inventory = 225400*100/98 = 230000 4
Solution/:- Cash Budget for January to June Particulars January February March April May June Inflows Cash Sales 20% of total sales 24,000 20,000 30,000 48,000 40,000 40,000 Collection from debtors:- 50% in the month following 30% in the second month 20% in the third month 88000 48,000 -------- 48,000 52,800 32,000 40,000 28,800 35,200 60,000 24,000 19,200 96,000 36,000 16,000 80,000 57,600 24,000 Issue of debenture 40,000 Total Inflows =200,000 =152,800 =134,000 =151,200 =188,000 =201,600 Outflows Payment to creditors 165,000 90,000 75,000 112,500 180,000 150,000 Wages and salaries:- 1/3 of last month 10000 8000 8000 8000 10000 9000 2/3 of current month 16000 16000 16000 20000 18000 18000 Miscellaneous expenses (one month s time-lag) 27000 21000 30000 24000 27000 27000 Total Outflow 218,000 135,000 129,000 164,500 235,000 204,000 Budgeted cash balance surplus/deficiency (18000) 17800 5000 (13300) (47000) (2400) Beginning balance 60000 42000 59800 64800 51500 40500 Ending Balance (Indicated) 42000 59800 64800 51500 4500 38100 Payment of interest -- -- -- -- -- 360 Borrowings required -- -- -- -- 36000 3000 Ending Balance (actually now estimated) 42000 59800 64800 51500 40500 40740 5
Inflows Working Cash Sales 20% of total sales i.e. January sales are 120,000 so 20% of 120,000 = 24,000 and so on. December sales are 220,000 received in January Cash Sales = 220,000*20%= 44,000 Remaining are Credits = 220,000 44,000 = 176,000 So sales received in January @50%. So, 176,000*50% = 88,000 than January s sales are received in February, February in March and so on. 30% received in 2 nd month November sales = 200,000 received in 2 nd month i.e. January so, Cash sales = 200,000*20%=40,000 Remaining credit = 200,000 40,000 = 160,000 After 2 month Received in January 30% so, 160,000*30% = 48,000 and so on. 20% received in 3 rd month In January, we have to receive October s sales but October s sales are not given. So in January there will be no receivables so Nil balance. However, November s sales received in February i.e. after 3 months. So November s sales = 200,000 Cash sales = 200,000*20%=40,000 Remaining credit = 200,000 40,000 = 160,000 After 3 month Received in February 20% so, 160,000*20% = 32.000 and so on. Outflows Working Payment to Creditors Particulars November December January February March April May June Sales 200,000 220,000 120,000 100,000 150,000 240,000 200,000 200,000 Purchase (75%of Sale as 25% is 150,000 165,000 90,000 75,000 112,500 180,000 150,000 150,000 gross margin) Purchases (one month in Advance) 165,000 90,000 75,000 112,500 180,000 150,000 150,000 NIL Payments (two month s time lag) NIL NIL 165,000 90,000 75,000 112,500 180,000 150,000 200,000*75% = 150,000 Purchases one month in advance: - November purchases made in October but October is not required. December purchases are made in November so 165,000 and so on. Payments two month s time lag:- November purchases made in September and December purchases made in October both are not required so NIL balance. January purchases are made in November so balance is 165,000 and so on. Wages & Salaries The time lag in the payment of wages and salaries is one-third of a month means 1/3 of last month and 2/3 of current month. Ending Balance (Indicated) = Beginning balance + Budgeted cash balance surplus/deficiency = 60000 + (18000) = 42000 VU instructor Guidelines It is mentioned that minimum cash balance requirement is Rs. 40,000. In month of May, ending cash balance is only Rs. 4,500 (4.5) so, rest of amount Rs. 35,500 (mention 36.0 in total in 6
solution) needs to borrow. That si why, borrowings mentioned at end of May are of Rs. 36,000 to maintain the requirement of minimum cash balance. Thereafter, it is mentioned that interest arte is 12% and paid monthly. So, 12% of Rs. 36,000 is Rs. 4,320 which is annual interest payment while monthly interest payment will be Rs. 4320/12= 360 (0.36). Solution/:- Part (a) Cash Budget Quarterly Particulars Quarters Total 1 2 3 4 Inflows Collection from debtors 1/3 of last month 2/3 of current month 3000 5000 2500 7000 3500 12000 6000 7000 = 15000 = 31000 Total Inflows =8,000 =9,500 =15,500 =13,000 =46,000 Outflows Production cost 7,000 10,000 8,000 8,500 = 33,500 Selling, administrative and other costs 1,000 2,000 2,900 1,600 = 7,500 Purchase of plant and other fixed assets 100 1,100 2,100 2,100 = 5,400 Total outflows =8,100 =13,100 =13,000 =12,200 =46,400 Budgeted cash balance surplus/deficiency (100) (3600) 2500 800 (400) Beginning balance 650 550 500 500 650 Ending Balance (Indicated) 550 (3050) 3000 1300 250 Required Borrowing (deficiency + minimum cash requirement) 3550 3550 Payments Made (2500) (800) (3300) Ending Balance (actually now estimated) 550 3550-3050=500 3000-2500=500 1300-800=500 (3550+250) -3300=500 7
Working Deficiency = - 3050 Borrowing required given in question = 500 Required borrowing = deficiency + minimum cash requirement = 3050 + 500 = 3550 Payments made at the end of quarters means at the beginning of next quarter. So 2 nd quarters payments are made in start of 3 rd quarter. So Payments Made at 3 rd quarter = Balance minimum cash required = 500 3000 = -2500 Payments Made at 4 th quarter = Balance minimum cash required = 500 1300 = -2500 Payments Made at 5 th quarter = Balance minimum cash required = 250 3550 = -3300 Solution/:- Part (b) Loan Outstanding = Borrowing required payments made = 3550 3300 = 250 Question/:- You have been asked to prepare a cash budget for the next quarter, January through March, for Sharmilee Exports. They have provided you with the following information: 1. Sales are expected to be: Rs.300,000 in January, Rs.260,000 in February, and Rs.350,000 in March. All sales will be in cash. 2. The estimated purchases are: Rs.240,000 in January, Rs.220,000 in February, and Rs.250,000 in March. Payments for purchases will be made after a lag of one month. Outstanding on account of purchases in December last are Rs.210, 000. 3. The rent per month is Rs.8, 000 and the partners personal withdrawal per month is Rs.12000. 4. Salaries and other expenses, payable in cash, are expected to be: Rs.15, 000 in January, Rs.15,000 in February, and Rs.16,000 in March. 5. They plan to buy two computers worth Rs.50, 000 on cash payment in March. 6. The cash balance at present is Rs.12, 000. Their target cash balance, however, is Rs.20, 000. What will be surplus/ deficit of cash in relation to their target cash balance? Solution/:- Projected cash Inflows and Outflows Particulars December January February March Inflows Sales Collection 300,000 260,000 350,000 Outflows Purchases 210,000 240,000 220,000 250,000 Payment to creditors are made after 1 month 210,000 240,000 220,000 Rent 8,000 8,000 8,000 Drawings 12,000 12,000 12,000 Salaries & other Expenses 15,000 15,000 16,000 Purchase of Computers 50,000 Total Outflows =210,000 =245,000 =275,000 =306,000 8
Given an opening cash balance of Rs.12000 and a target cash balance of Rs.20,000, the surplus / deficit in relation to the target cash balance is worked out below : Particulars January February March Net cash Flow (Inflow Outflow) 55,000 (15,000) 44,000 Cumulative net cash flow 55,000-15000+55000=40,000 44000+40,000= 84,000 Beginning Balance 12,000 Opening balance + Cumulative net cash flow 67,000 52,000 96,000 Minimum cash balance required 20,000 20,000 20,000 Surplus / Deficit 47,000 32,000 76,000 Cash Budget Quarterly Particulars April May June Inflows Beginning Cash balance Collection from debtors:- 140000 50150 29250 35% of sales collected in month of sale 136,500 127400 153300 60% of sales are collected in 2 nd month of sale 95550 152100 141,960 Total Inflows 372,050 329,650 324,510 Outflows or cash disbursements Purchases Wages, taxes & expenses Interest Equipment purchases 168000 53800 13100 87000 147800 51000 13100 147000 176300 78300 13100 0 Total outflows 321900 358900 267,700 Budgeted cash balance surplus/deficiency 50,150 (29,250) 56,810 9
Particulars Q1 Q2 Q3 Q4 Payments of accounts 75% of next quarters sales Purchases for 60 days Wages, taxes and other exp 20% of sales 196 186 214 250 Interest and Dividends 90 90 90 90 Total 1566 1864 2158 1996 698 582 803 785 938 916 818 838 VU instructor Guidelines It is mentioned first that purchases are 75% of next quarter sales. So, for Q1 purchases, we will take 75% of Q2 sales. This is Rs. 697.5 (or 698) is the purchases for Q1. Further, it is mentioned that credit period is 60 days means two months. So, Rs. 116 {698/12) *2} will be credit purchases while remaining Rs. 582 are cash purchases collected in first quarter. For Q2, Rs. 116 credit purchases of previous quarter while cash purchases of Q2 (will be calculated in same way as calculated for Q1) will be considered. Similarly, payments for Q3 & Q4 will be calculated. Unpaid amount of Q1 is Rs. 116 will be recovered in Q2 plus cash purchases of Q2 which will be calculated as: Total purchases (Q2) = 1,070*0.75 = Rs. 802.5 Credit Purchases (Q2) = (802.5/12)*2 = Rs. 133.75 Cash purchases (Q2) = 802.5-133.75 = Rs. 669 So, total purchases that will be paid in second quarter will be the unpaid amount of Q1 (Rs. 116) and cash purchases of Q2 (Rs. 669). So total payment in Q2 is Rs. 785. 10