Question

Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:

  

a.	On July 1, the beginning of the third quarter, the company will have a cash balance of $48,500.

b.	Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):

  

May (actual)	$	310,000
June (actual)	$	350,000
July (budgeted)	$	470,000
August (budgeted)	$	680,000
September (budgeted)	$	350,000

   

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.

   

c.	Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

	July			August			September
Merchandise purchases	$	282,000		$	408,000		$	210,000
Salaries and wages	$	43,000		$	54,000		$	55,000
Advertising	$	180,000		$	131,000		$	95,000
Rent payments	$	7,800		$	7,800		$	7,800
Depreciation	$	8,500		$	8,500		$	8,500

   

	Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $210,000.
d.	Equipment costing $10,000 will be purchased for cash during July.
e.	In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.

   

Required:
1.	Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total.
2.	Prepare a cash budget, by month and in total, for the third quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

     

Answer 1

1)

Schedule of Expected Cash Collections during the quarter

Particulars	July	August	September	Total Expected Cash Collections
Sales of May	$       9,300.00			$                9,300.00
Sales of June	$ 2,45,000.00	$     10,500.00		$          2,55,500.00
Sales of July	$ 1,17,500.00	$ 3,29,000.00	$      14,100.00	$          4,60,600.00
Sales of August		$ 1,70,000.00	$   4,76,000.00	$          6,46,000.00
Sales of September			$      87,500.00	$              87,500.00
Total	$ 3,71,800.00	$ 5,09,500.00	$ 5,77,600.00	$        14,58,900.00

2)

Cash Budget for the third quarter

Particulars	July	August	September
Opening Cash Balance -A	$     48,500.00	$       9,500.00	$      44,200.00
Cash Inflows
Sales as per Part -1	$ 3,71,800.00	$ 5,09,500.00	$   5,77,600.00
Loan Receipt	$     40,000.00
Total Cash Inflow -B	$ 4,11,800.00	$ 5,09,500.00	$ 5,77,600.00
Cash Outflow
Purchases	$ -2,10,000.00	$ -2,82,000.00	$ -4,08,000.00
Salaries and wages	$    -43,000.00	$    -54,000.00	$     -55,000.00
Advertising	$ -1,80,000.00	$ -1,31,000.00	$      95,000.00
Rent Payments	$      -7,800.00	$      -7,800.00	$       -7,800.00
Purchase of Equipment	$    -10,000.00
Repayment of Loan			$     -40,000.00
Interest on Loan			$       -1,200.00
Total Cash Outflow -C	$-4,50,800.00	$-4,74,800.00	$ -4,17,000.00
Closing Balance (A+B-C)	$       9,500.00	$     44,200.00	$ 2,04,800.00

Note:

Since there is no information, Expenses are paid in the month incurred

Interest on loan Paid while repaying the loan i.e, September