Question

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 $40,000, 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 $41,000.

b.	Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):

  

May (actual)	$	160,000
June (actual)	$	200,000
July (budgeted)	$	320,000
August (budgeted)	$	540,000
September (budgeted)	$	280,000

   

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 expenses for the third quarter are given below:

	July			August			September
Merchandise purchases	$	192,000		$	324,000		$	168,000
Salaries and wages	$	36,000		$	40,000		$	41,000
Advertising	$	110,000		$	110,000		$	81,000
Rent payments	$	5,000		$	5,000		$	5,000
Depreciation	$	5,000		$	5,000		$	5,000

   

	Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $120,000.
d.	Equipment costing $10,000 will be purchased for cash during July.
e.	In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.

Required:
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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Herbal Care Corp. Cash Budget July August September Quarter Beginning cash balance $41,000 Add receipts: Collections from customers Total cash available 41,000 0 0 0 Less cash disbursements: Merchandise purchases Salaries and wages Advertising Rent payments Equipment purchases Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 41,000 0 0 0 Financing: Borrowings Repayments Interest Total financing 0 0 0 Ending cash balance $41,000 $0 $0 $0

Answer 1

Quarter Herbal Care Corp. Schedule of Expected Cash Collections July Aug Sep From accounts receivable: May's sales collected $4,800 Jun's sales collected $140,000 $6,000 From budgeted receivable: Jul's sales collected $80,000 $224,000 $9,600 Aug's sales collected - $135,000 $378,000 Sep's sales collected - $70,000 Total cash collections $224,800 $365,000 $457,600 $4,800 ($160000 x 3%] $146,000 ($200000 x 70%; $200000 x 3%] $313,600 [$320000 x 25%; $320000 x 70%; $320000 x 3%] $513,000 ($540000 x 25%; $540000 x 70%] $70,000 ($280000 x 25%] $1,047,400

July AU Herbal Care Corp. Cash Budget Aug $41,000 $24,800 $224,800 $365,000 $265,800 $389,800 Sep $42,800 $457,600 $500,400 Quarter $41,000 [Previous month's ending balance) $1,047,400 [As calculated above] $1,088,400 --> (a) Beginning cash balance Cash collections Total cash available Less cash disbursements: Merchandise purchase Salaries and wages Advertising Rent payments Equipment purchase Total cash disbursement Excess Cash (Cash Deficieni Financing: Borrowings Repayments Interest Total financing Ending cash balance $120,000 $36,000 $110,000 $5,000 $10,000 $281,000 -$15,200 $192,000 $40,000 $110,000 $5,000 $0 $347,000 $42,800 $324,000 $41,000 $81,000 $5,000 $0 $451,000 $49,400 $636,000 [Previous month's purchases paid in current month] $117,000 $301,000 $15,000 $10,000 $1,079,000 --> (b) $9,400 --> (c) = (a) - (b) $0 $40,000 $0 $0 $40,000 $24,800 $0 $0 $0 $42,800 $40,000 $1,200 $41,200 $8,200 $40,000 $40,000 $1,200 $1,200 --> (d) (Sep. = $40000 + $1200] $8,200 --> (c) + (d)