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 $55,600, 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 $33,000. 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) $230,000 $290,000 $560,000 $710,000 $450,000 Past experience shows that 25% of a month's sales are collected in the month of sale, 69% 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 $238,000 $48,000 $148,000 $8,800 $8,800 August $350,000 $40,000 $130,000 $7,300 $8,800 September $156,000 $21,000 $72,000 $8,200 $8,800 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 $209,000. d. Equipment costing $8,800 will be purchased for cash during July. e. In preparing the cash budget, assume that the $55,600 loan will be made in July and repaid in September. Interest on the loan will total $1,070.

Answer 1

Requirement 1
Schedule of expected cash for July, August and September
	July	August	September	Quarter
From Account Receivables
May Sales	6900	0	0	6900
June Sales	200100	8700	0	208800
From Budgeted Sales
July Sales	140000	386400	16800	543200
August Sales	0	177500	489900	667400
September Sales	0	0	112500	112500
Total Cash Collections	347000	572600	619200	1538800

Requirement 2
Cash Budget
	July	August	September	Quarter
Total Cash available	435600	572600	619200	1627400
Total disbursements	422600	415300	507870	1345770
Excess / ( Deficiency) of receipts over disbursements	13000	157300	111330	281630
Total Financing	0			0
Cash balance , ending	13000	170300	281630	281630

Requirement 3
If the company needs a minimum cash balance of $10000
to start each month, can the loan be repaid as planned ?
Yes

Working Notes

Total Cash available	July	August	September	Quarter
Opening cash	33000			33000
Account Receivables	347000	572600	619200	1538800
Loan taken	55600	0	0	55600
Total Cash available	435600	572600	619200	1627400

Total Disbursements	July	August	September	Quarter
Accounts Payable	209000	238000	350000	797000
Equipments	8800	0	0	8800
Loan repayment	0	0	55600	55600
Interest on loan	0	0	1070	1070
Salary and wages	48000	40000	21000	109000
Advertising	148000	130000	72000	350000
Rent payment	8800	7300	8200	24300
Total Disbursements	422600	415300	507870	1345770

Working for Requirement 3

Even if the Company has a minimum cash balance at the beginning of each month , even then the Company shall be able to repay the loan as planned because

- in each month , the total cash collections is higher than total disbursements ( except in July month , where there is a shortfall of $ 10000 but the total collection for July - August - September is $ 1594400 while the total disbusements, including the Loan repayment is $ 1345770.

Hence, we can say that even if the company has a minimum of $ 10000 each month at the beginning of each month , the company shall be able to repay the loan as planned.

End of the answer.