Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $93,000, 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 $36,000. 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)	$	232,000	$	476,000	$	296,000
Merchandise purchases	$	188,000	$	163,500	$	135,500
Payroll	$	22,800	$	22,800	$	26,900
Lease payments	$	31,400	$	31,400	$	31,400
Advertising	$	63,600	$	63,600	$	41,680
Equipment purchases		−		−	$	102,000
Depreciation	$	17,800	$	17,800	$	17,800

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 $162,500.

4. In preparing the cash budget, assume that the $93,000 loan will be made in April and repaid in June. Interest on the loan will total $1,280.

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. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

	Prime Products Cash Budget April May June Quarter Beginning cash balance Add receipts: Collections from customers Total cash available Less cash disbursements: Merchandise purchases Payroll Lease payments Advertising Equipment purchases Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance

Answer 1

1)

1) Expected cash collections:	April	May	June	Quarter
Collections from credit sales:
Accounts receivable	$153,600	$20,480		$174,080
April sales ($232,000*30/100); ($232,000*60/100); ($232,000*8/100)	$69,600	$139,200	$18,560	$227,360
May sales ($476,000*30/100); ($476,000*60/100)		$142,800	$285,600	$428,400
June sales ($296,000*30/100)			$88,800	$88,800
Cash collections from customers	$223,200	$302,480	$392,960	$918,640

2)

Prime Products
Cash Budget
	April	May	June	Quarter
Beginning cash balance	$36,000	$71,900	$68,580	$176,480
Add: receipts:
Collections from customers	$223,200	$302,480	$392,960	$918,640
Total Cash available	$259,200	$374,380	$461,540	$1,095,120
Less: Cash disbursements:
Merchandise purchases	($162,500)	($188,000)	($163,500)	($514,000)
Payroll	($22,800)	($22,800)	($26,900)	($72,500)
Lease payments	($31,400)	($31,400)	($31,400)	($94,200)
Advertising	($63,600)	($63,600)	($41,680)	($168,880)
Equipment purchases			($102,000)
Total Cash Disbursements	($280,300)	($305,800)	($365,480)	($849,580)
Excess (deficiency) of cash available over disbursements	($21,100)	$68,580	$96,060	$245,540
Financing:
Borrowings	$93,000			$93,000
Repayments			($93,000)	($93,000)
Interest			($1,280)	($1,280)
Total financing	$93,000	$0	($94,280)
Ending cash balance	$71,900	$68,580	$1,780	$142,260