The monthly cash budget in this report assumes that the only cash inflow that the firm receives is collections from product sales. However, it is possible that Sorenson Stove Company has cash inflows from various other sources. Other possible sources of cash inflows for the company could be interest earned on invested capital; gains on the sale of assets; or capital raised by the issuance of stocks and bonds. The discrepancy between the monthly cash budget and daily cash budget is due to the assumptions of the daily cash budget. The daily cash budget assumes that collections are evenly spread throughout the month, while costs are not. This discrepancy points out a weakness in monthly cash budgets. Although the monthly cash budget in this report overestimated the funds needed for August, there could situation where the monthly cash budget underestimated the required loan amount. For example, if Sorenson Stove Company’s expenses clustered at the beginning of the month, while most of the collections were received at the end of the month, the monthly cash budget would not account for the funds needed on the first of the month to pay expenses. A daily cash budget would more accurately demonstrate the cash inflows and outflows in such a case as the example provided.
(A) Current Source of Financing
Sorenson Stove Company currently has a revolving credit agreement with its bank. The bank provides Sorenson Stove Company $1,000,000 a month and requires that the…