Highline: Cash Budgeting

Highline Hospital provides a wide range of health services in its community. Highline's board of directors has authorized the following capital expenditures that are planned for October 1, 2009:
Intra-aortic pump $1,400,000
Computed tomographic scanner 850,000
X-ray Equipment 550,000
Laboratory equipment 1,200,000
Total $4,000,000

The board wishes to know the amount of borrowing if any, necessary on that date. The comptroller has collected the following information to use in preparing an analysis of future cash flows:

Month Amount (Actual/Estimated)
January $5,300,000
February 5,300,000
March 5,400,000
April 5,400,000
May 6,000,000
June 6,000,000
July (Estimated) 5,800,000
August (Estimated) 6,000,000
September (Estimated) 6,600,000
October (Estimated) 6,800,000
November (Estimated) 7,000,000
December (Estimated) 6,600,000

Ninety percent of Highline's billings are made to third parties like Blue Cross, federal and state governments and private insurance companies. The remaining 10% are made directly to patients. Historical patterns of billing collections are:

Third Party Billings Patient Billings
Month of Service 20% 10%
Month following service 50% 40%
2nd Month after service 20% 40%
Uncollectible 10% 10%

The comptroller expects the same billing and collection patterns the hospital experienced in the first six months of 2009 to continue during the last six months of the year. The following schedule presents the purchases made during the past three months and the planned purchases for the last six months of 2009:
Month Amount
April $1,300,000
May 1,450,000
June 1,450,000
July 1,500,000
August 1,800,000
September 2,200,000
October 2,350,000
November 2,700,000
December 2,100,000

All purchases are made on account and accounts payable are remitted in the month following the purchase.
- Salaries for each the month during the remainder of 2009 are expected to be $1,800,000 plus 20% of that month's billings. Salaries are paid in the month of service
- Highline's monthly depreciation charges are $150,000.
- Highline incurs interest expenses of $180,000 per month and makes interest payments of $540,000 on the last day of each calendar quarter.
- Endowment fund income is expected to continue to total $210,000 per month .
- Highline has a cash on hand balance of $350,000 on July 1, 2009 and has a policy of maintaining a minimum end-of-month cash balance of 10% of the current month's purchases.
- Highline employs a calendar year reporting period.

(1) Prepare a cash budget by month for the third quarter of 2009 clealry showing cash collections, cash disbursements and cash balances at the beginning and end of each month.
(2) Determine the amount of borrowing if any, necessary on October 1, 2009 to acquire the capital items totalling $4,000,000.

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