Potter Corporation sells office supplies to government agencies. At the beginning of the current quarter, the company reports the following selected account balances:
cash $10,000
accounts receivable $200,000
current payables 85,000
Potter's management has made the following budget estimates regarding operations for the current quarter:
sales (estimated) 500,000
total costs and expenses (estimated) $400,000
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 payables. The company's ending prepayments balance is expected to be the same as its beginning prepayments balance. Its ending current payables 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.
Instructions:
a. Compute potter's budgeted cash receipts for the quarter.
b. Compute potter's payments of current payables 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 potters short-term borrowing requirements for the quarter.
f. Discuss problems potter might encounter in obtaining short-term financing.