Acc102 Principles of Managerial Accounting: Problem 23-4A Potter Corporation sells office supplies

Acc102 Principles of Managerial Accounting

Problem 23-4A Estimating Borrowing Requirements
Potter Corporation sells office supplies to government agencies. At the beginning of the current quarter, the company reports the following selected account balances:
Current quarter account balances:
Cash 10,000
Accounts Receivables 200,000
Current Payable 85,000

Potter's management has made the following budget estimates regarding operations for the current quarter:
Sales (estimated) 500,000
Total cost and expenses (estimated) 400,000 (see breakdown below)
Debt service payment (estimated) 145,000
Tax liability payment (estimated) 45,000

Of Potter's total costs and expenses, $30,000 is quarterly depreciation expense, and $20,000 represents the expiration of prepayments. The remaining $350,000 is to be financed with current payable. The company's ending prepayments balance is expected to be the same as its beginning prepayments balance. It’s ending current payable balance is expected to be $20,000 more than its beginning balance.
All of Potter's sales are on account. Approximately 65 percent of its sales are collected in the quarter in which they are made. The remaining 35 percent are collected in the following quarter. Because all of the company's sales are made to government agencies, it experiences virtually no uncollectible accounts.

Potter's minimum cash balance requirement is $10,000. Should the balance fall below this amount, management negotiates a short-term loan with a local bank. The company's debt ratio (liabilities / assets) is currently 80 percent.

a. Compute Potter's budgeted cash receipts for the quarter.
b. Compute Potter's payments for current payable budgeted for the quarter.
c. Compute Potter's cash prepayments budgeted for the quarter
d. Prepare Potter's cash budget for the quarter.
e. Estimate Potter's short-term borrowing requirements for the quarter.
f. Discuss problems Potter might encounter in obtaining short-term financing.
Powered by