Question

The president of the retailer Prime Products has just approached the company's bank with a request for a $30,000, 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 folowing 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 $33,400. Accountsceivable on April 1 will total $197,600, of which $162,000 will be collected during April and $27,400 will be collected during May. The remainder will be uncollectible. b. Past experience showsthat 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% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow: April June May $ 302,000 418,000 S 277,000 $ 206,000 134,500 S 149,000 $ 29,800 $29,800 S 24,500 $ 28,200 28,200 S 28,200 $ 73,600 73,600 S 43,680 Sales (all on account) Payroll Lease payments Equipment purchases Depreciation 98,000 $ 20,800 20,800 S 20,800 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total S160,500. c. d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June Interest on the loan will total S1,240 Required 1. Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total Prime Products Schedule of Expected Cash Collections April June Quarter From accounts receivable From April sales From May sales From June sales Total cash collections

Answer 1

Solution:

Part 1 –

Schedule of Expected Cash Collections
	April	May	June	Quarter
From Accounts Receivable	$162,000	$27,400
From April Sales	$90,600	$181,200	$24,160
From May Sales		$125,400	$250,800
From June Sales			$83,100
Total Cash Collections	$252,600	$334,000	$358,060	$944,660

Part 2

Prime Products
Cash Budget
	April	May	June	Quarter
Beginning cash balance	$33,400	$23,900	$20,300	$33,400
Add: Receipts
Collection from customers	$252,600	$334,000	$358,060	$944,660
Total cash available	$286,000	$357,900	$378,360	$978,060
Less: Cash disbursements
Merchandise Purchases	$160,500	$206,000	$134,500	$501,000
Payroll	$29,800	$29,800	$24,500	$84,100
Lease payments	$28,200	$28,200	$28,200	$84,600
Advertising	$73,600	$73,600	$43,680	$190,880
Equipment purchases			$98,000	$98,000
Total Cash disbursements	$292,100	$337,600	$328,880	$958,580
Excess (deficiency) of cash available over disbursements	-$6,100	$20,300	$49,480	$19,480
Financing
Borrowings	$30,000	$0		$30,000
Repayments	$0	$0	-$30,000	-$30,000
Interest	$0	$0	-$1,240	-$1,240
Total Finiancing	$30,000	$0	-$31,240	-$1,240
Ending Cash Balance	$23,900	$20,300	$18,240	$18,240

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