Question

Problem 7-25A Schedule of Expected Cash Collections; Cash Budget [LO7-2, LO7-8]

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 $41,500.

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

  

May (actual)	$	170,000
June (actual)	$	210,000
July (budgeted)	$	330,000
August (budgeted)	$	550,000
September (budgeted)	$	285,000

   

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	$	198,000		$	330,000		$	171,000
Salaries and wages	$	36,500		$	41,000		$	42,000
Advertising	$	115,000		$	111,500		$	82,000
Rent payments	$	5,200		$	5,200		$	5,200
Depreciation	$	5,250		$	5,250		$	5,250

   

	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 $126,000.
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

	May(Actual)	June(Actual)	July(budgeted)	August(Budgeted)	September(Budgeted)	October	November
Sales	$170000	$210000	$330000	$550000	$285000
Collection
25% collection in the same month	$42500 ($170000*25%)	$52500 ($210000*25%)	$82500 ($330000*25%)	$137500 ($550000*25%)	$71250 ($285000*25%)
70% collection in the next month		$119000 ($170000*70%)	$147000 ($210000*70%)	$231000 ($330000*70%)	$385000 ($550000*70%)	$199500 ($285000*70%)
3% collection in the second month following sale			5100 ($170000*3%)	$6300 ($210000*3%)	$9900 ($330000*3%)	$16500 ($550000*3%)	$8550 ($285000*3%)
Total	$42500	$171500	$234600	$374800	$466150	$216000	$8550

Rest 2% are bad debts hence not affected the cash receipts.

1.

	July	August	September	Quarter
Sales	$330000	$550000	$285000
Collection
25% collection in the same month	$82500 ($330000*25%)	$137500 ($550000*25%)	$71250 ($285000*25%)	$291250
70% collection in the next month	$147000 ($210000*70%)	$231000 ($330000*70%)	$385000 ($550000*70%)	$763000
3% collection in the second month following sale	5100 ($170000*3%)	$6300 ($210000*3%)	$9900 ($330000*3%)	$21300
Total	$234600	$374800	$466150	$1075550

2. Cash Budget for July to September

	July	August	September	Quarter
Opening Cash balance	$41500	$23400	$42500	$107400
Add: Cash receipts
Collection from sales	$234600	$374800	$466150	$1075550
Loan Taken	$40000			$40000
Total Cash collection	$274600	$374800	$466150	$1115550
Less: payments
Merchandise purchases	-$126000	-$198000	-$330000	-$654000
Salary and wages	-$36500	-$41000	-$42000	-$119500
Advertising	-$115000	-$111500	-$82000	-$308500
Rent Payments	-$5200	-$5200	-$5200	-$15600
Equipment Purchased	-$10000			-$10000
Loan Repayment			-$40000	-$40000
Interest on Loan			-$1200	-$1200
Total Cash Payment	-$292700	-$355700	-$500400	-$1148800
Closing cash balance (opening cash balance+ Cash collection- Cash payments)	$23400	$42500	$8250	$74150

It is given that the payment of merchandise purchase will be in the following month of purchase hence the June month account payable payment will be in July of $126000 and July month payment will be in the august month of $198000 and the august month payment will be in the September month of $330000.

It is assumed that salary, advertising and rent payment will be in the same month because no other information is given.