Question

Cash Budget

Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bank requires that a minimum balance of $8,180 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,180, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,180 at month-end.

Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans.

The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year.

Estimated beginning cash balance	$	9,100
Estimated cash sales:
October		13,580
November		29,390
December		44,090
Sales on account:
July (actual)		129,300
August (actual)		104,700
September (actual)		127,200
October (estimated)		134,000
November (estimated)		141,300
December (estimated)		187,200

Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 7 percent in the third month following the sale. The 3 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 cash on a note receivable in October.

All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available.

Inventory Purchases
September (actual)	$	120,700
October (estimated)		112,300
November (estimated)		128,200
December (estimated)		94,800

Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $37,500, $41,300, and $45,500, respectively.

Required:

Prepare Friendly Freddie’s cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. (CMA adapted). Enter all cash disbursements as positive values. If a cash balance is negative, enter the amount as a negative value. If an amount is zero, enter "0".

Friendly Freddie's
Cash Budget
October through December
	October	November	December
Beginning cash balance	$	$	$
Receipts:
Cash sales
Collections of sales on account
Note receivable repayment
Total cash available	$	$	$
Disbursements:
Payment of inventory purchases	$	$	$
Operating expenses
Loan repayment
Interest
Total disbursements	$	$	$
Cash balance	$	$	$
Bank loan
Adjusted cash balance	$	$	$

Answer 1

	Friendly Freddie's
	Cash Budget
	October through December
		October	November	December
		$	$	$
	Beginning cash balance	9100	9132	8539
	Receipts:
	Cash sales	13580	29390	44090
	Collections of sales on account (W/N-2)	119031	130448	137755
	Note receivable repayment	0	0	13000
	Total cash available	141711	168970	203384
	Disbursements:
	Payment of inventory purchases (W/N-3)	117079	108931	124354
	Operating expenses	37500	41300	45500
	Loan repayment	0	10000	12000
	Interest		200	480
	Total disbursements	154579	160431	181854
	Cash balance	-12868	8539	21530
	Bank loan	22000	0	0
	Adjusted cash balance	9132	8539	21530
W/N-1	Collections of sales on account	JULY	AUGUST	SEPTEMBER	OCTOBER	NOVEMBER	DECEMBER
SALES		129300	104700	127200	134000	141300	187200
NEXT MONTH	70%		90510	73290	89040	93800	98910
SECOND MONTH	20%			25860	20940	25440	26800
THIRD MONTH	7%				9051	7329	8904
UNCOLLECTIBE	3%				0	3879	3141
	CASH COLLECTED				119031	130448	137755
W/N-2	Payment of inventory purchases (W/N-2)
		SEPTEMBER	OCTOBER	NOVEMBER	DECEMBER
	INVENTORY PURCHASE	120700	112300	128200	94800
	DISBURSEMENTS		120700	112300	128200
	LESS-DISCOUNTS		3621	3369	3846
	Payment of inventory purchases		117079	108931	124354