Question

Kayak Co. budgeted the following cash receipts (excluding cash receipts from loans received) and cash payments (excluding cash payments for loan principal and interest payments) for the first three months of next year.

Cash Receipts Cash Payments
January $525,000 $475,000
February 400,000 350,000
March 450,000 $25,000

According to a credit agreement with its bank, Kayak requires a minimum cash balance of $40,000 at each month-end. In return, the bank has agreed that the company can borrow up to $150,000 at a monthly interest rate of 1%, paid on the last day of each month. The interest is computed based on the beginning balance of the loan for the month. The company repays loan principal with any cash in excess of $40,000 on the last day of each month. The company has a cash balance of $40,000 and a loan balance of $80,000 at January 1.

Required:
Prepare monthly cash budgets for January, February, and March.

Answer 1

Kayak Co.

Monthly Cash Budgets:

January February March

Bank Loan Balance $80,000 30,800 0

Beginning Cash Balance $40,000 $40,000 $58,592

Cash Receipts 525,000 400,000 450,000

Cash Payments (475,000) (350,000) (25,000)

Loan Interest Repayment (800) (308) 0

Balance 89,200 89,692 483,592

Loan Repayment -49,200 -30,800 0

Minimum Cash Balance 40,000 58,892 483,592

Step-by-step explanation:

Like all budgets, a cash budget is a financial planning tool for management to forecast the cash receipts and expenditures in order to be well prepared to deal with a cash shortage and excess when they occur. It helps management to assess if the business can be run smoothly with cash resources without liquidity problems.