Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $63,000, 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:

1. On April 1, the start of the loan period, the cash balance will be $42,000. Accounts receivable on April 1 will total $168,000, of which $144,000 will be collected during April and $19,200 will be collected during May. The remainder will be uncollectible.

2. 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		May		June
Sales (all on account)	$	286,000	$	664,000	$	315,000
Merchandise purchases	$	218,000	$	248,500	$	161,500
Payroll	$	32,800	$	32,800	$	22,400
Lease payments	$	41,000	$	41,000	$	41,000
Advertising	$	68,600	$	68,600	$	52,800
Equipment purchases	$	−		−		64,000
Depreciation	$	34,000	$	34,000	$	34,000

3. 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 $161,000.

4. In preparing the cash budget, assume that the $63,000 loan will be made in April and repaid in June. Interest on the loan will total $980.

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

Cash Collection
	Apr	May	June
Collection of accounts receivable	$144,000	$19,200
Collection of April sales (286000*30%,60%,8%)	$85,800	$171,600	$22,880
Collection of May sales (664000*30%,60%))		$199,200	$398,400
Collection of June sales (315000*30%)			$94,500
Total cash collections	$229,800	$390,000	$515,780

Cash disburments- Merchandised Purchased
	Apr	May	June
Payment of accounts payable	$161,000
Payment of Apr purchases		$218,000
Payment of May purchases			$248,500
Payment of June purchases			$0
Total cash disbursements- merchandised Purchased	$161,000	$218,000	$248,500

Cash Budget
	Apr	May	June	Qtr
Beginning cash balance	$42,000	$31,400	$61,000	$42,000
Add: receipts Collection from Cusmer	$229,800	$390,000	$515,780	$1,135,580
tal Cash Available	$271,800	$421,400	$576,780	$1,177,580
Less: Total disbursements
Merchandised Purchased	$161,000	$218,000	$248,500	$627,500
Payroll	$32,800	$32,800	$22,400	$88,000
Lease Payment	$41,000	$41,000	$41,000	$123,000
Advertising	$68,600	$68,600	$52,800	$190,000
Equipment Purchase			$64,000	$64,000
Total Cash Disbursement	$303,400	$360,400	$428,700	$1,092,500
Cash excess (deficiency) before financing	-$31,600	$61,000	$148,080	$85,080
Financing:
Borrowing of $63000	$63,000			$63,000
Loan principal repaid			-$63,000	-$63,000
Loan interest paid			-$980	-$980
Ending cash balance	$31,400	$61,000	$84,100	$84,100