Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $67,000, 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 $18,000. Accounts receivable on April 1 will total $173,600, of which $148,800 will be collected during April and $19,840 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)	$	452,000	$	544,000	$	323,000
Merchandise purchases	$	328,000	$	242,000	$	177,500
Payroll	$	31,000	$	31,000	$	19,200
Lease payments	$	34,600	$	34,600	$	34,600
Advertising	$	69,400	$	69,400	$	27,680
Equipment purchases		−		−	$	113,000
Depreciation	$	24,800	$	24,800	$	24,800

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 $170,500.

4. In preparing the cash budget, assume that the $67,000 loan will be made in April and repaid in June. Interest on the loan will total $1,020.

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

	Particulars	April	May	June	Quarter
	Budgeted sales	452000	544000	323000	1319000
	Cash collections:
	First month (30%)	135600	163200	96900	395700
	Second month (60%)		271200	326400	597600
	Third month (8%)			36160	36160
	From Accounts receivables	148800	19840		168640
	Total cash collections	284400	454240	459460	1198100
	Particulars	April	May	June	Quarter
	Beginning cash balance	18000	63900	55140	137040
	Add receipts:
	Collections from customers	284400	454240	459460	1198100
	Total cash available	302400	518140	514600	1335140
	Less cash disbursements:
	Merchandise purchased	170500	328000	242000	740500
	Payroll	31000	31000	19200	81200
	Lease payments	34600	34600	34600	103800
	Advertising	69400	69400	27680	166480
	Equipment purchases	0	0	113000	113000
	Excess (deficiency) of cash available over disbursements	-3100	55140	78120	130160
	Financing:
	Borrowing	67000	0	0	67000
	Repayments	0	0	-67000	-67000
	Interest	0	0	-1020	-1020
	Total financing	67000	0	-68020	-1020
	Ending cash balance	63900	55140	10100	129140
	Please ask me If you have any concerns..please rate