Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008 CAPE CHEMICAL: CASH MANAGEMENT

Complete “The Tasks” 1, 2, 4, 6, 7, and 8 found on pp. 85 – 86.

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).
2006 Collection Schedule % of sales
Current Month 20.0
Month following the sale 50.0
Second month following the sale 30.0
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?
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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

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?

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