Question

The president of the retailer Prime Products has just approached the company's bank with a request for a $87,000, 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 April through June, during which the loan will be used: a. On April 1, the start of the loan period, the cash balance will be $39,000. Accounts receivable on April 1 will total $170,800, of which $146,400 will be collected during April and $19,520 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: Sales (all on account) Merchandise purchases Payroll Lease payments Advertising Equipment purchases Depreciation April $ 242,000 $ 213,000 $ 19,600 $ 29,200 $ 62,600 $ - $ 16,800 May $ 618,000 $ 181,500 $ 19,600 $ 29,200 $ 62,600 - $ 16,800 June $ 310,000 $ 133,500 $ 24,800 $ 29,200 $ 47,680 112,000 $ 16,800

Answer 1

a)

Schedule of expected cash collections
	April	May	June	Quarter
Beginning	146400	19520		165920
April sales	242000*30%=72600	242000*60%= 145200	242000*8%= 19360	237160
May sales		618000*30%= 185400	618000*60%= 370800	556200
June sales			310000*30%= 93000	93000
Total cash collections	219000	350120	483160	1052280

b)

CASH BUDGET
	April	May	June	Quarter
Beginning cash balance	39000	59100	55820	153920
Add:cash collection from customers	219000	350120	483160	1052280
Total cash available	258000	409220	538980	1206200
less:cash disbursement
merchandise purchase	174500	242000	618000	1034500
payroll	19600	19600	24800	64000
lease payment	29200	29200	29200	87600
Advertising	62600	62600	47680	172880
Equipment purchase	0	0	112000	112000
Total cash disbursement	(285900)	(353400)	(831680)	(1470980)
Excess/(deficiency )of cash over disbursement	(27900)	55820	(292700)	(264780)
Financing
Borrowing	87000	0	0	87000
Repayment	0	0	(87000)	(87000)
Interest	0	0	(1220)	(1220)
Total financing	87000	0	(88220)	(1220)
Ending cash balance	59100	55820	(380920)	(266000)