Cash Flows from Operating Activities—Indirect Method
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Answer:
1. Cash budget from April to June are
April $12,120
May $11,820
June $13,420
2a. $10,850 minimum cash inflow from sales is required in May.
But the Business made an inflow of $11,820.
This is sufficient to cover its expense and leave the minimum balance of $250.
HealthMart won't have to borrow in May.
2b.I. Health Mart as a result of the 10% sales slump in May will require $40 loan to finance its cashflow
2b.ii. Health Mart will not be required to borrow to fund its cashflow requirement of $11,400 in May (5% expenditure increase) because it has sufficient inflow from revenue to cover it
3. The cash budget is a key requirement of the Financial Director of any business:
a. It guides the Business Investment decision (what to do with excess liquidity)
b. It guides the Business Finance decision (whether to Fund its working Capital through additional capital injection or Loans if the Cash Budget shows long period of cash drought, if the offload Assets or restructure the Business etc)
c. It serves as a guide in deciding its credit policy or approving additional credit days to its customers or seeking more Payable days from its Suppliers.
d. It helps in determining how to stock its inventory. How much inventory to retain on hand, how often to reorder etc
Explanation:
Health Mart
1.
Cash Budget from April to June
April
*Oxygen sales - $8,000 - Credit Card (97%) + Cash (3%) received before end of day
Cash inflow = $8,000
*Service cash inflow - $4,200 - Credit Sales received this month (60%) + $4,000 credit sales received from last month sales (40%)
Cash inflow = $2,520 + $1,600 = $4,120
Total inflow = $12,120
May
*Oxygen sales - $7,500 - Credit Card (97%) + Cash (3%) received before end of day
Cash inflow = $7,500
*Service cash inflow - $4,400 - Credit Sales received this month (60%) + $4,200 credit sales received from last month sales (40%)
Cash inflow = $2,640 + $1,680 = $4,320
Total inflow = $11,820
June
*Oxygen sales - $9,000 - Credit Card (97%) + Cash (3%) received before end of day
Cash inflow = $9,000
*Service cash inflow - $4,600 - Credit Sales received this month (60%) + $4,400 credit sales received from last month sales (40%)
Cash inflow = $2,760 + $1,760 = $4,420
Total inflow = $13,420
2a.
Expected expenditure = $11,000
Deduct: Opening cash Balance = $400
Add: Cash Balance projection = $250
= Minimum Cash inflow from Revenue in May 2018 = $10,850
Actual Cash inflow in May = $11,820
2b.i.
May (adjusted inflow)
*Oxygen sales - $6,750 - Credit Card (97%) + Cash (3%) received before end of day
Cash inflow = $6,750
*Service cash inflow - $3,960 - Credit Sales received this month (60%) + $4,200 credit sales received from last month sales (40%)
Cash inflow = $2,376 + $1,680 = $4,056
Adjusted Cash inflow = $10,806
Note:
Expected expenditure = $11,000
Deduct: Opening cash Balance = $400
Add: Cash Balance projection = $250
= Minimum Cash inflow from Revenue in May 2018 = $10,850
Actual Cash inflow in May (adjusted inflow) = $10,806
2b.ii.
Expected expenditure = $11,550
Deduct: Opening cash Balance = $400
Add: Cash Balance projection = $250
= Minimum Cash inflow from Revenue in May 2018 = $11,400
Actual Cash inflow in May = $11,820
