Question

Understanding Relationships, Cash Budget, Pro Forma Balance Sheet

Ryan Richards, controller for Grange Retailers, has assembled the following data to assist in the preparation of a cash budget for the third quarter of the year:

1. Sales:

   May (actual)	$100,000
   June (actual)	120,000
   July (estimated)	90,000
   August (estimated)	100,000
   September (estimated)	135,000
   October (estimated)	110,000

2. Each month, 30% of sales are for cash and 70% are on credit. The collection pattern for credit sales is 20% in the month of sale, 50% in the following month, and 30% in the second month following the sale.
3. Each month, the ending inventory exactly equals 50% of the cost of next month's sales. The markup on goods is 25% of cost.
4. Inventory purchases are paid for in the month following the purchase.
5. Recurring monthly expenses are as follows:
   

   Salaries and wages	$10,000
   Depreciation on plant and equipment	4,000
   Utilities	1,000
   Other	1,700

6. Property taxes of $15,000 are due and payable on July 15.
7. Advertising fees of $6,000 must be paid on August 20.
8. A lease on a new storage facility is scheduled to begin on September 2. Monthly payments are $5,000.
9. The company has a policy to maintain a minimum cash balance of $10,000. If necessary, it will borrow to meet its short-term needs. All borrowing is done at the beginning of the month. All payments on principal and interest are made at the end of a month. The annual interest rate is 9%. The company must borrow in multiples of $1,000.
10. A partially completed balance sheet as of June 30 follows. (Note: Accounts payable is for inventory purchases only.)

    Cash	$     ?
    Accounts receivable	?
    Inventory	?
    Plant and equipment, net	425,000
    Accounts payable				$     ?
    Common stock				210,000
    Retained earnings				268,750
    Total	$    ?			$    ?

Required:

1. Complete the balance sheet given in Item j.

Grange Retailers
Balance sheet
June 30
	Assets	L and OE
Cash	$
Accounts receivable
Inventory
Plant and equipment, net	425,000
Accounts payable		$
Common stock		210,000
Retained earnings		268,750
Total	$	$

Feedback

1. Use the accounting equation (assets = liabilities and owners' equity).

2. Prepare a cash budget for each month in the third quarter and for the quarter in total (the third quarter begins on July 1). Prepare a supporting schedule of cash collections. If an amount is zero, enter "0" or leave the entry box blank.

Grange Retailers
Cash Budget
For the Quarter Ending September 30
	July	August	September	Total
Beginning cash balance	$	$	$	$
Cash collections
Total cash available	$	$	$	$
Cash disbursements:
Purchases	$	$	$
Salaries and wages
Utilities
Other
Property taxes
Advertising fees
Lease
Total disbursement	$	$	$	$
Minimum cash balance
Total cash needs	$	$	$	$
Excess (deficiency)	$	$	$	$
Financing:
Borrowings	$	$	$	$
Repayments
Interest
Total financing	$	$	$	$
Ending cash balance	$	$	$	$
Cash collections:
Cash sales	$	$	$	$
Credit sales:
Current month
Prior month
From two months ago
Total collections	$	$	$	$

3. Prepare a pro forma balance sheet as of September 30.

Grange Retailers
Balance Sheet
September 30
	Assets	L and OE
Cash	$
Accounts receivable
Inventory
Plant and equipment
Accounts payable		$
Common stock
Retained earnings
Total	$	$

Answer 1

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