Reference no: EM13574053
For this case, assume that today is June 30, 2014.
Lackawanna Medical Center provides a wide range of hospital services in northeastern Pennsylvania. The hospital's board of directors has recently authorized the following capital expenditures. The expenditures are planned for October 1, 2014, and the board would like to know the amount of borrowing, if any, that will be necessary on that date to be able to make these expenditures.
Capital Expenditures planned for October 1, 2014:
Neonatal Care equipment $ 900,000
CT scanner 800,000
X-ray equipment 650,000
Laboratory equipment 1,450,000
Total $3,800,000
Marc Kelly, controller, has gathered the following information to be used in preparing an analysis of future cash flows.
- Billings, made in the month of service, for the first six months of 2014 are listed below.
Month Actual Amount
January $4,400,000
February 4,400,000
March 4,500,000
April 4,500,000
May 5,000,000
June 5,000,000
Cash Budget Problem continued
- Ninety percent of the hospital's billings are made to third parties such as Blue Cross, federal or state governments, and private insurance companies. The remaining 10 percent of the billings are made directly to patients. Historical patterns of billing collections are presented below.
Third-Party Direct Patient
Billings Billings
During month of service 20% 10%
During month following service 50% 40%
During second month following service 20% 40%
Uncollectible 10% 10%
- Estimated billings for the last six months of 2014 are detailed in the following schedule. The same billing and collection patterns that have been experienced during the first six months are 2014 are expected to continue during the last six months of the year.
Month Estimated Amount
July $4,500,000
August 5,000,000
September 5,500,000
October 5,700,000
November 5,800,000
December 5,500,000
- The actual purchases of the past three months and the planned purchases for the last six months of 2014 are presented in the following schedule.
Month Amount__
April $1,100,000
May 1,200,000
June 1,200,000
July 1,250,000
August 1,500,000
September 1,850,000
October 1,950,000
November 2,250,000
December 1,750,000
Cash Budget Problem continued
- Additional information follows:
- The Medical Center is expecting to receive income of $175,000 per month from an endowment fund.
- The Medical Center has a cash balance of $300,000 on July 1, 2014, and has a policy of maintaining a minimum end-of-month cash balance of 10 percent of the current month's purchases.
- All purchases are made on account, and accounts payable are paid in the month following the purchase.
- Salaries for each month during the remainder of 2014 are expected to be $1,500,000 per month plus 20 percent of that month's billings. Salaries are paid in the month of service.
- The Medical Center's monthly depreciation charges are $125,000.
- The Medical Center incurs interest expense of $150,000 per month and makes interest payments of $450,000 on the last day of each quarter (i.e., March 31, June 30, September 30, and December 31).
Required:
- Prepare a schedule of budgeted cash receipts by month for the third quarter of 2014 (July through September).
- Prepare a schedule of budgeted cash disbursements by month for the third quarter of 2014.
- Determine the amount of borrowing, if any, necessary on October 1, 2014, to acquire the capital expenditure items totaling $3,800,000.