Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $71,000, 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 $43,800. Accounts receivable on April 1 will total $179,200, of which $153,600 will be collected during April and $20,480 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)	$235,000	$652,000	$342,000
Merchandise purchases	$197,000	$213,500	$151,000
Payroll	$33,600	$33,600	$23,100
Lease payments	$39,600	$39,600	$39,600
Advertising	$70,200	$70,200	$83,280
Equipment purchases	-	-	70,000
Depreciation	$31,200	$31,200	$31,200

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 $145,500.

4. In preparing the cash budget, assume that the $71,000 loan will be made in April and repaid in June. Interest on the loan will total $1,060.

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

23 Prime Products Schedule of Expected Cash collections April 153,600 70,500 June May 20,480 141,000 195,600 24 From Accounts Receivable 25 From April Sales 26 From May Sales 27 From June Sales 28 Total Cash Collections 29 18,800 391,200 102,600 512,600 Quarter 174,080 230,300 586,800 102,600 1,093,780 224,100 357,080 Prime Products Cash Budget April Quarter May 50,000 June 66,680 43,800 43,800 224,100 267,900 357,080 407,080 512,600 579,280 1,093,780 1,137,580 31 32 33 Beginning cash balance 34 Add receipts 35 Collections from Customers 36 Total Cash available 37 Less; Cash Disbursments 38 Merchandise Purchases 39 Payroll 40 Lease Payments 41 Advertising 42 Equipment Purchases 43 Total Cash Disbursements 44 Excess (deficiency) of Cash available over disbursements 145,500 33,600 39,600 70,200 197,000 33,600 39,600 70,200 213,500 23,100 39,600 83,280 70,000 429,480 149,800 556,000 90,300 118,800 223,680 70,000 1,058,780 78,800 288,900 (21,000) 340,400 66,680

71,000 45 Financing; 46 Borrowing 47 Repayment 48 Interest 49 Total Financing 50 Ending Cash Balance 51 (71,000) (1,060) (72,060) 77,740 71,000 (71,000) (1,060) (1,060) 77,740 71,000 50,000 66,680