Preparing a financial budget
Assume Davis Consulting began January with $29,000 cash. Management
forecasts that cash receipts from credit customers will be $49,000 in January and
$51,500 in February. Projected cash payments include equipment purchases ($17,000
in January and $40,000 in February) and selling and administrative expenses ($6,000
Davis’s bank requires a $20,000 minimum balance in the firm’s checking account.
At the end of any month when the account balance falls below $20,000,
the bank automatically extends credit to the firm in multiples of $5,000. Davis
borrows as little as possible and pays back loans each month in $1,000 increments,
plus 5% interest on the entire unpaid principal. The first payment occurs one
month after the loan.
1. Prepare Davis Consulting’s cash budget for January and February 2013.
2. How much cash will Davis borrow in February if cash receipts from customers
that month total $21,500 instead of $51,500?