Question

The president of the retailer Prime Products has just approached the company's bank with a request for a $55.000, 90- day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months Aprill through June, during which the loan will be used a. On April 1, the start of the loan period, the cash balance will be $26,000. Accounts receivable on April 1 will total $156,800, of which $134,400 will be collected during April and $17.920 will be collected during May. The remainder will be uncollectible, b. Past experience shows that 30% of a month's sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected Budgeted sales and expenses for the three-month period follow. April May June Sales (all on $375,000 $412,000 $336,000 account) Merchandise purchases $238,000 $155.000 $172.000 Payroll $ 18,800 $ 18,800 $ 22,500 Lease payments $ 24,400 $ 24.400 $ 24.400 Advertising $ 74,800 $ 74,800 $ 50.420 Equipment purchases - $106,500 Depreciation $ 17,000 $ 17,000 $ 17,000 C. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $166,500. d. In preparing the cash budget, assume that the $55,000 loan will be made in April and repaid in June. Interest on the loan will total $900. Required: 1. Calculate the expected cash collections for April, May, and June, and for the three months in total. 2. Prepare a cash budget, by month and in total, for the three-month period. Complete this question by entering your answers in the tabs below. Required Required Calculate the expected cash collections for April, May, and June, and for the three months in total. Schedule of Expected Cash Collections April May June Quarter Total cash collections

Answer 1

1.

Schedule of Cash Collections
	April	May	June	Quarter
Collected in same month @30%	$   1,12,500	$ 1,23,600	$ 1,00,800	$ 3,36,900
Collected in following month @60%	$   1,34,400	$ 2,25,000	$ 2,47,200	$ 6,06,600
Collected in following next month @8%		$      17,920	$    30,000	$      47,920
Total Cash Collections	$   2,46,900	$ 3,66,520	$ 3,78,000	$ 9,91,420

2.

Cash Budget
	April	May	June	Quarter
Beginning Cash Balance	$       26,000	$      43,400	$    53,920	$           26,000
Add receipts:
Collections from Customers	$   2,46,900	$ 3,66,520	$ 3,78,000	$       9,91,420
Total cash available	$   2,72,900	$ 4,09,920	$ 4,31,920	$     10,17,420
Less Cash Disbursements
Merchandise Purchase	$   1,66,500	$ 2,38,000	$ 1,55,000	$       5,59,500
Payroll	$       18,800	$      18,800	$    22,500	$           60,100
Lease Payments	$       24,400	$      24,400	$    24,400	$           73,200
Advertising	$       74,800	$      74,800	$    50,420	$       2,00,020
Equipment Purchases			$ 1,06,500	$       1,06,500
Total Cash Disbursements	$   2,84,500	$ 3,56,000	$ 3,58,820	$       9,99,320
Excess (Deficiency) of cash	$     -11,600	$      53,920	$    73,100	$           18,100
Financing
Borrowing	$       55,000			$           55,000
Repayment			$   -55,000	$         -55,000
Interest			$         -900	$               -900
Total financing	$       55,000	$               -	$   -55,900	$               -900
Ending Cash balance	$       43,400	$      53,920	$    17,200	$           17,200