Question

Herbal Care is ready to begin its third quarter. The company has requested a $40,000, 90-day loan for its bank to
help meet cash requirements during the quarter. The bank’s loan officer has asked the Herbal to prepare a cash
budget for the quarter. In response, the following data have been assembled:

1. On July 1, the beginning of the third quarter, the company will have a cash balance of $65,000.
2. Actual sales for the last two months and budgeting sales for the third quarter are shown below. Past
experience shows that 20% of a month’s sales are collected in the month of the sale, 50% in the month
following the sale, and 25% in the second month following the sale. The remainder is uncollectible.

Month Amount
May (actual) $350,000
June (actual) $380,000
July (budgeted) $450,000
August (budgeted) $550,000
September (budgeted) $260,000

3. Budgeted merchandise purchases and budgeted expenses for the third quarter are shown below.
Merchandise purchases are paid in full during the month following the purchase. Accounts payable for
merchandise purchases on June 30, which will be paid during July, total $240,000. All other cash expenses are
paid in the month of the expense.

Item    July    August    September
Merchandise purchases    $ 250,000 $ 250,000 $ 245,000
Salaries and wages 50,000    50,000 50,000
Advertising    130,000 110,000 90,000
Rent payments 9,000 9,000 9,000
Depreciation    20,000 20,000 20,000

4. Equipment costing $30,000 will be purchased for cash during July.
5. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September.
Interest on the loan, $1200, will be paid in September.

Required:
Prepare a cash budget for the third quarter (July, August, and September). Include four columns in your cash
budget: one for each month, and one for the entire third quarter.   

Answer 1