Reference no: EM132351025
CASE - CAPE CHEMICAL: CASH MANAGEMENT
CASE DESCRIPTION
The primary subject matter of this case concerns the development and use of a cash budget as a key component in a cash management system. The case also allows an examination of the difference between accounting profit (based on accrual accounting) versus cash flow. The case requires students to have an introductory knowledge of accounting, finance and general business issues, thus the case has a difficulty level of three (junior level) or higher. The case is designed to be taught in one class session of approximately 1.25 hours and is expected to require 3-4 hours of preparation time from the students.
THE TASK
Prepare answers to the following questions:
1. Construct a monthly cash budget for Cape Chemical for the period January through December 2007. Assume that all cash flows occur on the 15th of each month. Is the current $200,000 line of credit sufficient to meet the needs of Cape Chemical during the year? Explain your answer.
2. The cash budget contains both cash inflows and cash outflows. Which do you feel are likely to be the most accurate? Explain your answer.
3. Stewart thought it would be beneficial to prepare an additional cash budget based on the 2006 collection schedule (a less optimistic assumption).
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2006 Collection Schedule
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% of sales
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Current Month
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20.0
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Month following the sale
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50.0
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Second month following the sale
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30.0
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Will the $200,000 revolving credit agreement be sufficient? Explain your answer.
Note: Assume $39,000 of November and $195,600 of December revenue will be collected in January. Assume $48,900 of December revenues will be collected in February.
4. Why is depreciation expense not part of the cash budget?
5. The monthly cash budget prepared assumes that all cash flows occur on the 15th of each month. Suppose most of Cape Chemical's outflows are at the beginning of the month, while its collections are toward the end of each month. How would this fact alter the cash budget?
6. Temporary excess cash can be invested in marketable securities. What are the characteristics of marketable securities? If excess cash is projected to be continuing rather than temporary, are marketable securities the appropriate investment? Explain your answer.
7. Once again assume all cash flows occur on the 15th of each month. How large of a line of credit would you recommend Stewart and Ford arrange with the bank? Defend your answer.
8. Suppose the bank refused to grant a larger line of credit what options are available to the company?
Attachment:- Assignment Cash Budget.rar