Question

Problem 8 Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $20,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled a. On July 1, the beginning of the third quarter, the company will have a cash balance of $24,000 b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account): May (actual... $200,000 June (actual).. 250,000 August (budged.375,000 September (budgeted220,000 Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible c. Budgeted merchandise purchases and budgeted exp s for the third quarter are given b elow Salaries and wages... Advertising Rent payment. Depreciation July August September Merchandise purchases. $210,000 $218,750 S120,313 52,000 54,000 53,000 ng.65,000 72,000 40,000 6,000 7,000 6,000 6,000 7,000 7,000 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which wil be paid during July, total $157,500 d. Equipment costing $21,000 will be purchased for cash during July e. In preparing the cash budget, assume that the $20,000 loan wl be made in July and repaid in September. Interest on the loan will total S600 equire 1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total 2. Prepare a cash budget, by month and in total, for the third quarter 3. If the company needs a minimum cash balance of $10,000 to start each month, can the loan be repaid as planned? Explain.

Answer 1

1.Schedule of Expected Cash Collections:

	July	August	September	Total
25% in the month of Sale	87,500	93,750	55,000	236,250
70% in following month	175,000	245,000	262,500	682,500
3% in second month following the same	6,000	7,500	10,500	24,000
Expected Cash Collections	268,500	346,250	328,000	942,750

2. Cash Budget:

	July	August	September	Total
Opening Balance	24,000	11,000	15,250	24,000
Add: Cash Collections	268,500	346,250	328,000	942,750
Loan Taken	20,000			20,000
Total Available Cash	312,500	357,250	343,250	986,750
Less: Merchandise Payments	157,500	210,000	218,750	586,250
Salaries and Wages	52,000	54,000	53,000	159,000
Advertising	65,000	72,000	40,000	177,000
Rent Payments	6,000	6,000	6,000	18,000
Equipment purchase	21,000			21,000
Repayment of Loan			20,000	20,000
Interest on Loan			600	600
Total Payments	301,500	342,000	338,350	981,850
Ending Cash Balance	11,000	15,250	4,900	4,900

Depreciation is a non-cash expenditure, it is not considered in cash budget.

3.If the company needs a minimum cash balance of $10,000 each month, the loan cannot be repaid as planned. Since after paying the loan, the cash balance will reach $4,900