Cash Flow Problem Answer Key

Cash Budget Problem

Answer the following questions using the information below:

The following information pertains to Hepburn Company:

Month Sales Purchases January $60,000 $32,000 February $80,000 $40,000 March $100,000 $56,000

∙ Cash is collected from customers in the following manner: Month of sale 30% Month following the sale 70% ∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. ∙ Labor costs are 20% of sales. Other operating costs are $30,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred. ∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of 1,000.

1) How much cash will be collected from customers in March?
A) $94,000
B) $86,000
C) $100,000
D) None of these answers are correct.
Answer: B
Explanation: B) ($80,000 × 70%) + ($100,000 × 30%) = $86,000
Diff: 2
Terms: cash budget
Objective: A
AACSB: Analytical skills

2) How much cash will be paid to suppliers in March?
A) $46,400
B) $56,000
C) $88,000
D) None of these answers are correct.
Answer: A
Explanation: A) ($40,000 × 60%) + ($56,000 × 40%) = $46,400
Diff: 2
Terms: cash budget
Objective: A
AACSB: Analytical skills
3) How much cash will be disbursed in total in March?
A) $42,000
B) $50,000
C) $88,400
D) $96,400
Answer: C
Explanation: C) ($40,000 × 60%) + ($56,000 × 40%) + ($100,000 × 20%) + ($30,000 - $8,000) = $88,400
Diff: 2
Terms: cash budget
Objective: A
AACSB: Analytical skills

4) What is the ending cash balance for March?
A) ($50,000)
B) $6,000
C) $5,600
D) $6,600
Answer: D
Explanation: D) $8,000 + $86,000 - $88,400 + $1,000 = $6,600
Diff: 2
Terms: cash budget
Objective: A
AACSB: Analytical skills