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 $51,500. b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account) May (actual) June (actual) July (budgeted) August (budgeted) September (budgeted) $ 370,000 $ 410,000 $ 530,000 $ 740,000 $ 380,000 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: Merchandise purchases Salaries and wages Advertising Rent payments Depreciation July $318,000 $ 46,000 $210,000 $ 9,000 $ 10,000 August $444,000 $ 60,000 $140,000 $ 9,000 $10,000 September $228,000 $ 61,000 $101,000 $ 9,000 $ 10,000 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 $246,000. 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. Daauirad.

Answer 1

Required Budgets are as prepared below:

Herbal Care Corp.
Schedule of expected Cash collections
Particulars	July	August	September	Quarter
From Account Receivable:
May Sales	11,100
June Sales	287,000	12,300		299,300
From budgeted sales:
July Sales	132,500	371,000	15,900	519,400
August Sales		185,000	518,000	703,000
September sales			95,000	95,000
Total cash collections	430,600	568,300	628,900	1,616,700
Herbal Care Corp.
Cash Budget
Particulars	July	August	September	Quarter
Beginning Cash balance	51,500	1,100	42,400	51,500
Add: Collection from customers	$430,600	$568,300	$628,900	1,627,800
Total cash available	$482,100	$569,400	$671,300	$1,679,300
Less: cash Disbursements
Merchandise purchase	($246,000)	($318,000)	($444,000)	-1,008,000
Salaries and wages	-46,000	-60,000	-61,000	-167,000
Advertising	-210,000	-140,000	-101,000	-451,000
Rent payments	-9,000	-9,000	-9,000	-27,000
Equipment purchase	-10,000			-10,000
Total cash disbusrement	-521,000	-527,000	-615,000	-1,663,000
Excess (deficiency) of cash available over disbursement	-38,900	42,400	56,300	16,300
Financing
Borrowing	40,000			40,000
Repayment			-40,000	-40,000
Interest			-1,200	-1,200
Total Financing	40,000	0	-41,200	-1,200
Ending cash balance	1,100	42,400	15,100	15,100