CASH MANAGEMENT

1. From the following forecasts of Income and Expenditure, prepare a Cash Budget for the months
January to April, 2012:
Months
Sales
Purchases
Wages
Other Expenses
(Credit)
(Credit) Rs.
Rs.
Rs.
Rs.
November 2011
30,000
15,000
3,000
2,760
December 2011
35,000
20,000
3,200
2,815
January 2012
25,000
15,000
2,500
2,690
February 2012
30,000
20,000
3,000
2,820
March 2012
35,000
22,500
2,400
2,890
April 2012
40,000
25,000
2,600
3,090
Additional information is as follows:
(i) The customers are allowed a credit period of 2 months
(ii) A dividend of Rs. 10,000 is payable in April.
(iii) Capital expenditure to be incurred
a. Plant purchased on 15th January for Rs. 5,000.
b. A building has been purchased on 1st March and the payment is to be made in monthly instalments
of Rs. 2,000 each.
(iv) The suppliers allow a credit of 2 months.
(v) Wages are paid on the 1st of next month.
(vi) Tim lag in payment of other expenses is 1 month.
(vii) Balance of cash on 1st January is Rs. 15,000.
2. From the following particulars, prepare a monthly cash budget for the quarter ended 31 st March 2014.
Month
Nov 2013
Dec 2013
Jan 2014
Feb 2014
March 2014

Sales (Rs)

Purchases(Rs)

Wages (Rs)

5,00,000
6,00,000
4,00,000
5,00,000
6,00,000

1,00,000
2,00,000
3,00,000
2,00,000
1,00,000

2,00,000
2,00,000
2,20,000
2,20,000
2,40,000

Expenses
(Rs)
40,000
40,000
50,000
50,000
50,000

Additional Information:
i.
10% sales and purchases are on cash.
ii.
Credit tp debtors: one month on an average, 50% of debtors will make payment on the due date
while the rest will make payment one month thereafter.
iii.
Credit from creditors: 2 months
iv.
Wages to be paid twice in a month on the 1st and 16th respectively.
v.
Expenses are generally paid within the month.
vi.
Plant costing Rs 1,00,000 will be installed in February on payment of 25% of the cost in
additions to the installation cost of Rs 5,000, balance to be paid in three equal instalments from
the following month.
vii.
Opening cash balance is Rs 2,00,000.
3. ABC Ltd requested to prepare a cash budget for the period of 6 months from January to June 2014 from
the following information.
(Rs in Lakhs)
Particulars
Jan
Feb
March
April
May
June
Sales
80
100
120
120
120
120
Purchases
2
3
4
4
4
2
Wages
12
14
16
16
16
12
Manufacturing expenses
26
27
28
28
28
26
Administration expenses
4
4
4
4
4
4
Distribution expense
4
6
8
8
8
4
Additional Information:
i.
Receipt of interest of Rs 2 lakhs each in the months of Jan and May.
ii.
Receipt of dividend of Rs 3 lakhs each in the months of March and June.
iii.
Sale of securities in the month of June for Rs 300 lakhs.
iv.
Payment of interest during January for Rs 50,000.
v.
Payment of loan in the month of June for Rs 150 lakhs.
vi.
Interim dividend payment of Rs 10 lakhs in the month of April.
vii.
Installment of machine in the month of June for Rs 42 lakhs.
viii.
10% of each months sale is for cash.
ix.
Customers are allowed a credit period of 1 month.
x.
Creditors allow a credit period of 2 months.
xi.
Wages are paid on the 1st of the following month.
4. X Ltd. feels a Lock Box system (LBS) would reduce its debtors collection period by 2 days. The average
number of daily payments is 50. Credit sales are Rs. 8,000 billed on a continuous basis. However, the

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cost of renting the Lock Box is Rs. 3,000 per annum. The bank charges for operating the LBS are Rs.
72,000. The interest is 15%. Should the system be introduced?
A firm uses a continuous billing system which result in an average daily receipt of Rs 40,00,000. If a
concentration banking is introduced it would reduce the collection period by 2 days. This system would
cost Rs 75,000 p.a and 8% can be earned by the firm on its investments. It is also found that a Lock box
system would reduce the overall collection time by 4 days and would cost Rs 120,000 p.a. Which
system would you recommend the company to introduce?
JPL has two dates when it receives its cash inflows, i.e., 15 th February and 15th August. On each of
these days, it expects to receive Rs 15 crores. Cash expenditure are expected to be steady throughout
the subsequent 6 month period. Presently, the ROI in marketable securities is 8% per annum, and the
cost of transfer from securities to cash is Rs. 125 each time a transfer occurs.
(i) What is the optimal transfer size using the EOQ model? What is the average cash balance?
(ii) What would be your answer to part (i) if the ROI were 12% per annum and the transfer costs were
Rs 75? Why do they differ from those in part (i)?
What are the motives for holding cash?
What do you mean by playing the float?

7.
8.
9. What is the difference between Collection float and payment float? Cite examples.
10. Discuss the important features of the Miller and Orr model.
11. Explain the Baumols model of cash management.