Kay Co. always prepares a cash budget for the months of January, February and March. Estimated sales for these months are Rs 500,000, Rs 600,000 and Rs 750,000 respectively. Actual sales for the month of December were Rs 520,000. About 80 per cent of Kay Co.’s total sales are on cash basis and 20 per cent credit sales collectible after one month. Kay Co. pays its creditors, which are usually about 40 per cent of sales, one month after the sale month.

        The forecasts of salary expenses for the coming three months are expected to be Rs 280,000 per month. Kay Co. is expected to spend about Rs 80,000 in February and Rs 190,000 in March on capital expenditures. A previously declared dividend of Rs 75,000 is to be paid in January and miscellaneous expenses are estimated to be Rs 15,000 per month. The company also has Rs 36,000 bills payable in February.

        (a)   Prepare a statement showing the sale receipts.

        (b)   Assuming that the 1 January cash balance is Rs 500,000  and that the minimum cash balance requirement of the  company is Rs 500,000, prepare a cash budget for the next three months.

        (c)   Explain the reason for estimated cash shortage that appears imminent.

        (d)   Suppose that Kay Co. lends any surplus at 15 per cent per year for one month and borrows for three months at 18 per cent year when there is a cash shortage. Make the necessary changes in your cash budget prepared in (b) to make it balance. Assume that interest is paid at the end of any borrowing or lending period.