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	$	8,830
Estimated cash sales:
October		13,590
November		29,440
December		43,610
Sales on account:
July (actual)		130,500
August (actual)		104,800
September (actual)		127,600
October (estimated)		134,100
November (estimated)		142,000
December (estimated)		187,700

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 $12,900 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)	$	120,900
October (estimated)		111,900
November (estimated)		128,400
December (estimated)		96,000

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 $37,900, $41,500, and $46,100, 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

Ans- Friendly Freddie's

Cash Budget

October through December

	October	November	December
Beginning cash balance	$8,830	$8,562	$9,505
Receipts:
Cash Sales	13,590	29,440	43,610
Collections of sales on account (WN-1)	119,415	126,726	135,152
Notes receivable repayment	12,900
Total cash available	$154,735	$164,728	$188,267
Disbursements:
Payment of inventory purchases (WN-2)	117,273	108,543	124,548
Operating Expenses	37,900	41,500	46,100
Interest		180	80
Total disbursements	$155,173	$150,223	$170,728
Cash Balance	(438)	14,505	17,539
Bank loan to borrow	9,000	-	-
Bank loan to repay	-	5,000	4,000
Adjusted cash balance	$8,562	$9,505	$13,539

Working Note-1-

Collections of sales on account-

	July	August	September	October	November	December
Sales on account	$130,500	$104,800	$127,600	$134,100	$142,000	$187,700
Cash collection schedule
70% in the month following sale				89,320	93870	99,400
20% in the second month following sale				20,960	25,520	26,820
7% in the third month following sale				9,135	7,336	8,932
Total				119,415	126,726	135,152

Working Note-2- Inventory payment schedule

	September	October	November	December
Inventory Purchase	120,900	111,900	128,400	96,000
97% of previous month		117,273	108,543	124,548

Working Note-3-

Interest payment schedule-

	October	November	December
Loan opening balance	-	9,000	4,000
Add: Bank loan borrowed	9,000	-	-
Less: Bank loan repayment	-	5,000	4,000
Closing balance	$9,000	$4,000	-
Interest @2% on closing balance	-	$180	$80

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