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 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 $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: Sales (all on account) Merchandise purchases Payroll Lease payments Advertising Equipment purchases Depreciation April May June $ 375,000 $ 412,000 $336,000 $ 238,000 $ 155,000 $ 172,000 $ 18,800 $ 18,800 $ 22,500 $ 24,400 $ 24,400 $ 24,400 $ 74,800 $ 74,800 $ 50, 420 - $ 106,500 $ 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.

Answer 1

3 4 6 #7 99 20 1 +2 3 14 35 26 1. Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total. April May June Quarter From accounts receivable $ 134,400 $ 17,920|| $ 152,320 From April sales: 375000*0.3 112,500 $ 112,500 375000*0.6 225,000 $ 225,000 375000*0.08 30,000 $ 30,000 From May sales: 412000*0.3 123,600 123,600 412000*0.6 247,200 247,200 From June sales: 336000*0.3 100,800 100,800 Total cash collections $ 246,900 $ 366,520 $ 378,000 $991,420

48 2. Prepare a cash budget, by month and in total, for the three-month period. April 26,000 May 43,400 June 53,920 Quarter 26,000 246,900 272,900 366,520 409,920 378,000 431,920 991,420 1,017,420 166,500 18,800 24,400 74,800 238,000 18,800 24,400 74,800 51 Beginning cash balance 52 Add receipts: Collections from 53 customers 54 Total cash available 55 Less cash disbursements: 56 Merchandise purchases 57 Payroll 58 Lease payments 59 Advertising 50 Equipment purchases 51 Total cash disbursements Excess (deficiency) of cash available over 52 disbursements 53 Financing 54 Borrowings 55 Repayments 56 Interest 57 Total financing 58 Ending cash balance 155,000 22,500 24,400 50,420 | 106,500 358,820 559,500 60,100 73,200 200,020 106,500 999,320 284,500 356,000 (11,600) 53,920 73,100 18,100 55,000 (55,000)| (900) (55,900) 17,200 55,000 (55,000) (900) (900) 17,200 55,000 43,400 53,920