Question

The McClain Corp. is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $ 75,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Because McClain Corp has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company to prepare a cash budget for the third quarter.

The following data has been gathered by the staff.

1. On July 1, 20X9, the beginning of the third quarter, the company will have a cash balance of $ 51,000.
2. Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account).

Month	Amount in Dollars ($)
May (actual)	410,000
June (actual)	380,000
July (budgeted)	440,000
August (budgeted)	470,000
September (budgeted)	420,000

Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following the sale, and 2% in the second month following the sale. The remainder is uncollectible.

3. Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below.

	July	August	September
Purchases (Merchandise)	$180,000	$175,000	$165,000
Salaries	$85,000	$85,000	$75,000
Advertising	$100,000	$110,000	$120,000
Rent Payments	$35,000	$35,000	$35,000
Depreciation	$45,000	$45,000	$45,000

Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $165,000.

4. The company will purchase equipment for the month of July, which is expected to cost $20,000, and it will be paid during the month of July.
5. In preparing the cash budget, assume that the $75,000 loan will be made in July and repaid in September. Interest on the loan will be $3,500.

Answer 1

Expected cash collections for July, August and September: July Aug May's sales collected $8,200 Jun's sales collected $266,000 $7,600 Jul's sales collected $110,000 $308,000 Aug's sales collected $117,500 Sep's sales collected Total cash collections $384,200 $433,100 Sep - [$410000 x 2%] - [$380000 x 70%; $380000 x 2%] $8,800 ($440000 x 25%; $440000 x 70%; $440000 x 2%] $329,000 ($470000 x 25%; $470000 x 70%] $105,000 [$420000 x 25%] $442,800

Aug $105,200 $433,100 $538,300 Sep $128,300 [Previous month's ending balance] $442,800 [As calculated above] 571,100 The McClain Corp. Cash Budget July Beginning cash balance $51,000 Cash collections $384,200 Total cash available $435,200 Less cash disbursements: Merchandise purchase $165,000 Salaries $85,000 Advertising $100,000 Rent $35,000 Equipment purchase $20,000 Total cash disbursements $405,000 Excess Cash (Cash Deficiency) $30,200 Less: Minimum cash balance $0 Add: Loan availed $75,000 Less: Loan & interest repaid Ending cash balance $105,200 $180,000 $85,000 $110,000 $35,000 $175,000 [Previous month's purchases paid in current month] $75,000 $120,000 $35,000 $410,000 $128,300 $405,000 --> (b) $166,100 --> (c) = (a) - (b) $0 So $78,500 [$75,000 + $3,500] $87,600 $128,300