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 $8,220 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,220, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,220 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	$	8,850
Estimated cash sales:
October		13,770
November		29,420
December		43,860
Sales on account:
July (actual)		129,400
August (actual)		104,000
September (actual)		128,200
October (estimated)		134,700
November (estimated)		142,600
December (estimated)		187,300

Projected cash collection of sales on account is estimated to be 71 percent in the month following the sale, 19 percent in the second month following the sale, and 8 percent in the third month following the sale. The 2 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $12,700 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)	$	120,200
October (estimated)		112,200
November (estimated)		128,400
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 $37,900, $40,500, and $45,800, 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	$	$	$

Feedback

The Cash Budget is critical to managers’ planning. It shows how much cash will be available each time period. Companies without sufficient cash may not survive even if their net income is positive.

Answer 1

Description	July	August	September	October	November	December
Cash Sale	-	-	-	13,770	29,420	43,860
Credit Sale	129,400	104,000	128,200	134,700	142,600	187,300
Credit sale collection- next month-71%		91,874	73,840	91,022	95,637	101,246
Credit sale collection- next second month-19%		-	24,586	19,760	24,358	25,593
Credit sale collection- next third month-8%				10,352	8,320	10,256
Credit sale collection				121,134	128,315	137,095
Material Purchase			120,200	112,200	128,400	94,800
Material payment- Next month with 3% discount		-	-	116,594	108,834	124,548
Opening cash				8,850	8,960	10,221
Receipts
Cash sale				13,770	29,420	43,860
Credit sale				121,134	128,315	137,095
Note receivable repayment				12,700
Total cash availble				156,454	166,695	191,176
Disbursements
Payment of inventory				(116,594)	(108,834)	(124,548)
Operating expense				(37,900)	(40,500)	(45,800)
Loan repayment					(7,000)
Interest					(140)
Total discursement				(154,494)	(156,474)	(170,348)
Preliminary cash balance				1,960	10,221	20,828
Bank loan				7,000	-	-
Closing cash balance				8,960	10,221	20,828