Question

The president of the retailer Prime Products has just approached the company's bank with a request for a $59,000, 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 $37,000. Accounts receivable on April 1 will total $162,400, of which $139,200 will be collected during April and $18,560 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: April 122,000 96,000 337, 000 $ 270, COO $ 203, 500 $ 1 f4, ooo 28,100 28,100 $25, 300 40,800 40,800 40, 800 $ 78,200 5 78,200$65, Ba0 May June Salca (all on account) Herchandise purchases Payroll Lease payments Adver. l.іні ng Dcuipment purchases Deprecialion $6, 000 s 28,200 $ 28,200 $ 28,200 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 $172,500 d. In preparing the cash budget, assume that the $59,000 loan will be made in April and repaid in June. Interest on the loan will total $940 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

Agwily $139,200 $18,560 June ·Quarter 157,760 [Given] $413,560 [$422,000 x 30%; $422,000 x 60%; $422,000 x 896] $446,400 [$496,000 x 30%; $496,000 x 60%) Beginning receivable collected $126,600 $253,200 $33,760 April's sales collected $148,800 $297,600 May's sales collected $101,100 $101,100 [$337,000 x 30%) June's sales collected $265,800 $420,560 $432,460 $1,118,820 Total cash collections

Requirement-2: Prime Products Cash Budget April Ma June Quarter $37,000 $41,900 $45,060 $37,000 [Previous month's ending balance] $265,800 $420,560 $432,460 $1,118,820 [Ref: Requirement-1] $302,800 $462,460 $477,520 $1,155,820 - ->(a) Beginning cash balance Cash receipts Total cash available Less cash disbursements: $172,500 $270,000 $203,500 $646,000 [Previous month's purchase paid in current monthl $82,100 Merchandise purchase $28,400 $28,400 $25,300 Payroll $40,800 $40,800 $40,800 $122,400 Lease Payment $78,200 $78,200 $65,880 $222,280 Advertising $0 $0 $76,000 $76,000 Equipment purchase Total cash disbursements $319,900 $417400 $411,480 $1,148,780 (b) Excess (Deficit) cash balance $17,100 $45,060 66,040 $7,040 ->(c)(a) (b) Financing: $59,000 $0 $0 $59,000 Borrowings $0 $0 $59,000 $59,000 [Given] $0 Repayments $0 -$940 [Given] Interest $59,000 -S940 (d) Total financing $0 -$59,940 $41,900 $45.060 S6,100 $6,100 --> (c)(d) Ending cash balance (As depreciation is a non-cash expense and it doesn't involve cash outflow, it is not considered in the cash budget)