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Chapter 18

Q. 18.S-T.2

Cash Balance for Greenwell Corporation The Greenwell Corporation has a 60-day average collection period and wishes to maintain a $160 million minimum cash balance. Based on this and the information given in the following cash budget, complete the cash budget. What conclusions do you draw?

GREENWELL CORPORATION
Cash Budget (in millions)

Q4 Q3 Q2 Q1
$240 Beginning receivables
$135 $180 $165 150 Sales
Cash collections
Ending receivables
Total cash collections
190 185 160 170 Total cash disbursements
Net cash inflow
$45 Beginning cash balance
Net cash inflow
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)

Step-by-Step

Verified Solution

Because Greenwell has a 60-day collection period, only those sales made in the first 30 days of the quarter will be collected in the same quarter. Total cash collections in the first quarter will thus equal 30/90 = 1⁄3 of sales plus beginning receivables, or 1⁄3×$150+240=$290.
Ending receivables for the first quarter (and the second-quarter beginning receivables) are the other 2⁄3 of sales, or 2⁄3×$150=$100. The remaining calculations are straightforward, and the completed budget follows.

GREENWELL CORPORATION
Cash Budget
(in millions)

Q4 Q3 Q2 Q1
$120 $110 $100 $240 Beginning receivables
135 180 165 150 Sales
165 170 155 290 Cash collections
$90 $120 $110 $100 Ending receivables
$165 $170 $155 $290 Total cash collections
190 185 160 170 Total cash disbursements
-$25 -$15 -$5 $120 Net cash inflow
145 $160 $165 $045 Beginning cash balance
-25 -15 -5 120 Net cash inflow
$120 $145 $160 $165 Ending cash balance
-160 -160 -160 -160 Minimum cash balance
-$40 -$15 $0 $5 Cumulative surplus (deficit)

The primary conclusion from this schedule is that, beginning in the third quarter, Greenwell’s cash surplus becomes a cash deficit. By the end of the year, Greenwell will need to arrange for $40 million in cash beyond what will be available.