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C hapter 29

SOLUTIONS. C hapter 29. MANAGEMENT OF CASH AND MARKETABLE SECURITIES. PROBLEM 29.13. Prepare a cash budget of XYZ Ltd for the 6 months commencing April on the basis of the following information: (i) Costs and prices remain unchanged.

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C hapter 29

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  1. SOLUTIONS Chapter 29 MANAGEMENT OF CASH AND MARKETABLE SECURITIES

  2. PROBLEM 29.13 • Prepare a cash budget of XYZ Ltd for the 6 months commencing April on the basis of the following information: • (i) Costs and prices remain unchanged. • (ii) Cash sales are 25 per cent of the total sales and balance 75 per cent are credit sales. • (iii) 60 per cent of credit sales are collected in the month following the sales, balance 30 per cent and 10 per cent in the two following months, respectively. No bad debts are anticipated. • (iv) Sales forecast is as follows: • January Rs 12,00,000 June Rs 8,00,000 • February 14,00,000 July 12,00,000 • March 16,00,000 August 10,00,000 • April 6,00,000 September 8,00,000 • May 8,00,000 October 12,00,000

  3. (v) Gross profit margin, 20 per cent. • (vi) Anticipated purchases: • April Rs 6,40,000 • May 6,40,000 • June 9,60,000 • July 8,00,000 • August 6,40,000 • September 9,60,000 • (vii) Wages and salaries to be paid: • April Rs 1,20,000 • May 1,60,000 • June 2,00,000 • July 2,00,000 • August 1,60,000 • September 1,40,000 • (viii) Interest @ 6 per cent on debentures of Rs 20,00,000 is paid quarterly and is payable in June and September. • (ix) Excise deposit due in July, Rs 2,00,000. • (x) Capital expenditure for plant and machinery planned for September, Rs 1,20,000. • (xi) Company has a cash balance of Rs 4,00,000 as at March 31. This is the minimum desired cash balance per month. • (xii) The company can borrow on monthly basis. Ignore interest on borrowings. • (xiii) Rent is Rs 8,000 per month.

  4. SOLUTION 29.13 • Cash budget of XYZ Ltd from April to September (figures are in thousands of rupees) • Particulars January February March April May June July August September • Total sales 1,200 1,400 1,600 600 800 800 1,200 1,000 800 •   Cash sales (0.25) 300 350 400 150 200 200 300 250 200 •   Credit sales (0.75) 900 1,050 1,200 450 600 600 900 750 600 • Cash inflows: •   Cash sales 150 200 200 300 250 200 • Collection from debtors: •       In the month following sales (0.60) 720 270 360 360 540 450 •       In the 3rd month from sales (0.30) 315 360 135 180 180 270 •       In the 4th month from sales (0.10) 90 105 120 45 60 60 • Total 1,275 935 815 885 1,030 980 • Cash outflows: • Purchases (paid in the same month) 640 640 960 800 640 960 • Wages and salaries (paid in the same month) 120 160 200 200 160 140 • Interest (Rs 20 lakh ´ 0.06 ´ 3/12) — — 30 — — 30 • Excise duty — — — 200 — — • Plant and machinery — — — — — 120 • Rent 8 8 8 8 8 8 • Total 768 808 1,198 1,208 808 1,258 • Surplus (deficiency) 507 127 (383) (323) 222 (278) • Beginning cash balance 400 907 1,034 651 400 550 • Closing cash balance 907 1,034 651 328 622 272 • Proposed borrowings (repayment) — — — 72 (72) 128 • Ending balance (actually now estimated) 907 1,034 651 400 550 400

  5. PROBLEM 29.14 • A firm is contemplating various actions each of which will have different effects on the average age of inventory, accounts receivable and accounts payable. Which of the following four plans is better if the changes indicated below are expected? • Change in average age Plan Inventory Accounts receivable Accounts payable days days days • A +30 –20 +35 • B –10 0 –20 • C 0 –30 +5 • D –15 +10 +15

  6. SOLUTION 29.14 Change in cash cycle     Change in average age Total change   + (increase) – (decrease) Inventory (days) Debtors (days) Creditors (days) (days) A + 30 –20 + 35 –25 B –10 0 –20 + 10 C 0 –30 + 5 –35 D –15 + 10 + 15 –20 Plans A and C are better than other plans (B, D) because they reduce the cash cycle by 25 days. Between plans A and C, plan C should be preferred because in plan A, the average age of inventory increases by 30 days, whereas in plan C, there is no increase at all; carrying the inventory also involves costs other than interest.

  7. PROBLEM 29.15 • The following information is available in respect of a firm: • (i) On an average, accounts receivable are collected after 80 days; inventories have an average of 100 days and accounts payable are paid approximately 60 days after they arise. • (ii) The firm spends a total of Rs 1,81,20,000 annually at a constant rate. • (iii) It can earn 8 per cent on investments. • Calculate (a) the firm’s cash cycle and cash turnover assuming a 360-day year; (b) minimum amount of cash to be maintained to meet payments as they become due; (c) savings by reducing the average age of receivables to 70 days.

  8. SOLUTION 29.15 • (i) (a) Cash cycle: 80 days + 100 days – 60 days = 120 days • (b) Cash turnover = 360 ÷ 120 days = 3 • (ii) Minimum operating cash = Total operating annual outlay/Cash turnover = Rs 1,81,20,000 ¸ 3 = Rs 60,40,000 • (iii) Cash cycle = 120 days – 10 days = 110 days • Cash turnover = 360/110 = 3.273 • Minimum operating cash = Rs 1,81,20,000/3.273 = Rs 55,36,713 • Reduction in investment = (Rs 60,40,000 – Rs 55,36,713) = Rs 5,03,287 • Savings = 0.08 ´ Rs 5,03,287 = Rs 40,263.

  9. FINANCIAL END OF THE CHAPTER MANAGEMENT

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