Question

he president of the retailer Prime Products has just approached the company’s bank with a request for a $49,000, 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 $38,500. Accounts receivable on April 1 will total $148,400, of which $127,200 will be collected during April and $16,960 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)	$	480,000	$	450,000	$	327,000
Merchandise purchases	$	315,000	$	183,000	$	163,000
Payroll	$	21,400	$	21,400	$	19,800
Lease payments	$	34,200	$	34,200	$	34,200
Advertising	$	74,600	$	74,600	$	65,800
Equipment purchases		−		−	$	75,000
Depreciation	$	16,200	$	16,200	$	16,200

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 $186,000.

4. In preparing the cash budget, assume that the $49,000 loan will be made in April and repaid in June. Interest on the loan will total $840.

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

Question 1

Particulars	April	May	June	Total
Collection of Accounts Receivables of March	127,200	16,960	0	144,160
Collection of April Sales	144,000	288,000	38,400	470,400
Collection of May Sales	0	135,000	270,000	405,000
Collection of June Sales	0	0	98,100	98,100
Total Cash Collection	271,200	439,960	406,500	1,117,660

Collection of April Sales

In the Month of April = 30% of April Sales

= 30% of $ 480,000

= $ 144,000

In the Month of May = 60% of April Sales

= 60% of $ 480,000

= $ 144,000

In the Month of June = 8% of April Sales

= 8% of $ 480,000

= $ 38,400

Collection of May Sales

In the Month of May = 30% of May Sales

= 30% of 450,000

= $ 135,000

In the Month of June = 60% of May Sales

= 60% of 450,000

= $ 270,000

Collection of June Sales

In the Month of June = 30% of June Sales

= 30% of 327,000

= $ 98,100

Question 2

Cash Budget

Particulars	April	May	June	Total
Beginning Cash Balance	38,500	42,500	37,260	38,500
Add: Cash Collection Expected	271,200	439,960	406,500	1,117,660
Total Cash Available	309,700	482,460	443,760	1,156,160
Less: Cash Disbursements
Cash Payment for Material Purchases	(186,000)	(315,000)	(183,000)	(684,000)
Payroll	(21,400)	(21,400)	(19,800)	(62,600)
Lease Payment	(34,200)	(34,200)	(34,200)	(102,600)
Advertising	(74,600)	(74,600)	(65,800)	(215,000)
Equipment Purchases	0	0	(75,000)	(75,000)
Total Cash Disbursement	(316,200)	(445,200)	(377,800)	(1,139,200)
Cash Excess / (Cash Deficiency)	(6,500)	37,260	65,960	16,960
Financing:
Borrowing	49,000	0	0	49,000
Repayments	0	0	(49,000)	(49,000)
Interest	0	0	(840)	(840)
Net Financing	49,000	0	(49,840)	(840)
Ending Cash Balance	42,500	37,260	16,120	16,120

Notes

For Merchandise Purchases

Payment of April Purchases is done in May.

Payment of May Purchases is done in June.

Payment of March Accounts Payables is done in April.

Depreciation is irrelevant for Cash Budget as it is a Non Cash Expense.