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.

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

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.

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