Question

1. 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 $8,210 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,210, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,210 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	$	9,140
   Estimated cash sales:
   October		13,800
   November		29,250
   December		43,830
   Sales on account:
   July (actual)		130,600
   August (actual)		103,200
   September (actual)		127,300
   October (estimated)		135,100
   November (estimated)		142,400
   December (estimated)		188,700

   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 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $12,800 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)	$	120,800
   October (estimated)		111,500
   November (estimated)		127,600
   December (estimated)		94,400

   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 $38,500, $41,000, and $46,200, 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	9,140	8,364	20,830
Receipts:
Cash sales	13,800	29,250	43,830
Collections of sales on account	126,300	134,411	169,139
Note receivable repayment	12,800
Total cash available	162,040	172,025	233,799
Disbursements:
Payment of inventory purchases	117,176	108,155	123,772
Operating expenses	38,500	41,000	46,200
Loan repayment	0	2,000	0
Interest	0	40	0
Total disbursements	155,676	151,195	169,972
Cash balance	6,364	20,830	63,827
Bank loan	2,000	0	0
Adjusted cash balance	8,364	20,830	63,827

Collection of Sales on Account
	Oct	Nov	Dec
71% in month of Sales	95,921	101,104	133,977
19% in second month	24,187	25,669	27,056
6% in third month	6,192	7,638	8,106
Estimated Collections	126,300	134,411	169,139