Question

During the last week of August, Oneida Company’s owner approaches the bank for a $108,500 loan to be made on September 2 and repaid on November 30 with annual interest of 9%, for an interest cost of $2,441. The owner plans to increase the store’s inventory by $60,000 during September and needs the loan to pay for inventory acquisitions. The bank’s loan officer needs more information about Oneida’s ability to repay the loan and asks the owner to forecast the store’s November 30 cash position. On September 1, Oneida is expected to have a $4,500 cash balance, $121,600 of net accounts receivable, and $100,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash disbursements for the next three months follow.

Budgeted Figures*	September		October		November
Sales	$	220,000	$	475,000	$	480,000
Merchandise purchases		240,000		220,000		198,000
Cash payments
Payroll		20,200		22,000		24,300
Rent		8,000		8,000		8,000
Other cash expenses		34,100		30,600		20,250
Repayment of bank loan						108,500
Interest on the bank loan						2,441

*Operations began in August; August sales were $160,000 and purchases were $120,000.

The budgeted September merchandise purchases include the inventory increase. All sales are on account. The company predicts that 24% of credit sales is collected in the month of the sale, 44% in the month following the sale, 21% in the second month, 8% in the third, and the remainder is uncollectible. Applying these percents to the August credit sales, for example, shows that $70,400 of the $160,000 will be collected in September, $33,600 in October, and $12,800 in November. All merchandise is purchased on credit; 40% of the balance is paid in the month following a purchase, and the remaining 60% is paid in the second month. For example, of the $120,000 August purchases, $48,000 will be paid in September and $72,000 in October.

Required:
Prepare a cash budget for September, October, and November. (Round your final answers to the nearest whole dollar.)

Answer 1

The company will be in a position to honor the repayment of the loan obligation as per the Cash Budget.

Cash Budget of Oneida for Sep-Nov
	Sep($)	Oct ($)	Nov ($)	Total
Cash & Bank Balance (Opening)	4,500	125,900	141,700	4,500
Add:
Bank Loan	108,500	-	-	108,500
Cash Sale				-
Cash collections From Drs.	123,200	244,400	383,200	750,800
Total Inflow	231,700	244,400	383,200	859,300
Less:
Cash Outflow
Cash Purchases	-	-	-	-
Payment of Crs.	48,000	168,000	232,000	448,000
Payroll	20,200	22,000	24,300	66,500
Rent	8000	8000	8000	24,000
Exp.	34,100	30,600	20,250	84,950
Loan repayment	-	-	108,500	108,500
Interest on Loan	-	-	2,441	2,441
Total Outflow	110,300	228,600	395,491	734,391
Cash & Bank Balance (Closing)	125,900	141,700	129,409	129,409

Working Notes:

Collections from Debtors
Month	Sales	Aug	Sep($)	Oct ($)	Nov ($)	Total	Outstanding (Including Bad Debts)
Aug	160000	38400	70400	33600	12800	155200	4800
Sep	220000	0	52800	96800	46200	195800	24200
Oct	475,000	0	0	114000	209000	323000	152000
Nov	480000	0	0	0	115200	115200	364800
Collection / Totals	1335000	38400	123200	244400	383200	789200	545800

*

	Month 0	Month 1	Month 2	Month 3
Collection	24%	44%	21%	8%

Payments to Creditors
		Aug	Sep($)	Oct ($)	Nov ($)	Total	Outstanding
Aug	120000	0	48000	72000		120000	0
Sep	240000	0	0	96000	144000	240000	0
Oct	220,000	0	0	0	88000	88000	132000
Nov	198000	0	0	0	0	0	198000
Total	778000	0	48000	168000	232000	448000	330000

Note: There is a contradiction in the assignment about opening accounts payable of $100,000. It should be $120,000 as all purchases paid from the month following the month of purchase.