Question

Northeast Auto​ Parts, a​family-owned auto parts​ store, began January with $10,600 cash. Management forecasts that collections from credit customers will be $11,300 in January and $14,700 in February.The store is scheduled to receive $6,500 cash on a business note receivable in January. Projected cash payments include inventory purchases ​($14,400 in January and $12,200 in February) and selling and administrative expenses​($3,500 each​ month). Northeast Auto​ Parts's bank requires a​ $10,000 minimum balance in the​ store's checking account. At the end of any month when the account balance falls below​ $10,000, the bank automatically extends credit to the store in multiples of​$1,000. Northeast Auto Parts borrows as little as possible and pays back loans in quarterly installments of $2,500​, plus 33​% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.1. Pleaseprepare Northeast Auto​Parts's cash budget for January and February.
2. How much cash will Northeast Auto Parts borrow in February if collections from customers that month total $13,700 instead of $14,700​?

Answer 1

Answer:

Part 1. $500 required

Part 2. $1,500 required

Explanation:

Part 1.

                                     Northern Auto Parts

                                           Cash Budget

Cash Receipts:

                                                         January       February

Beginning cash balance                     10600         10500

Cash receipts from customers            11300          14700  

Cash receipt on note receivable        6500              0    

Cash available                                     28400        25200

Cash payments:    

Purchases of inventory                         14400           12200

Selling and administrative expenses    3500            3500  

Total cash payments                          17900           15700

Now

                                                                              $                  $

Cash Receipts:                                                  28400        25200

Cash payments:                                             17900         15700

Ending cash balance before financing          10500           9500  

Less: Ending cash balance Required             10000          10000

Projected cash excess                                       500             -500  

Total effects of financing                                     0                 500  

Ending cash balance                                         10500          10,000

Part 2.

Cash Receipts:

                                                         January       February

Beginning cash balance                     10600         10500

Cash receipts from customers            11300          13700  

Cash receipt on note receivable        6500              0    

Cash available                                     28400        24200

Cash payments:    

Purchases of inventory                         14400           12200

Selling and administrative expenses    3500            3500  

Total cash payments                          17900           15700

Now

                                                                              $                  $

Cash Receipts:                                                  28400        24200

Cash payments:                                             17900         15700

Ending cash balance before financing          10500           8500  

Less: Ending cash balance Required             10000          10000

Projected cash excess                                       500             -1500  

Total effects of financing                                     0                1500  

Ending cash balance                                         10500          10,000  

The company will have to borrow $1,500 in the month February.