Question

Jodi Horton, president of the retailer Crestline Products, has just approached the company’s bank with a request for a $34,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories in support of peak April sales. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April–June, during which the loan will be used:

a.	On April 1, the start of the loan period, the cash balance will be $29,000. Accounts receivable on April 1 will total $136,000, of which $128,500 will be collected during April and $5,400 will be collected during May. The remainder will be uncollectible.

b.	Past experience shows that 20% of a month’s sales are collected in the month of sale, 75% in the month following sale, and 4% in the second month following sale. The other 1% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

	April		May		June
Sales (all on account)	$	199,000	$	309,000	$	339,000
Merchandise purchases	$	119,900	$	169,900	$	149,900
Payroll	$	9,500	$	9,500	$	8,500
Lease payments	$	13,000	$	13,000	$	13,000
Advertising	$	71,200	$	73,300	$	56,600
Equipment purchases	$	9,100		−		−
Depreciation	$	9,900	$	9,900	$	9,900

c.	Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on March 31, which will be paid during April, total $108,300.

d.	In preparing the cash budget, assume that the $34,000 loan will be made in April and repaid in June. Interest on the loan will total $800.

Required:

1.	Prepare a schedule of expected cash collections for April, May, and June and for the three months in total.

     

2.	Prepare a cash budget, by month and in total, for the three-month period. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

     

Answer 1

1.

	April	May	June	Quarter Total
Accounts receivable balance	$128,500	$5,400	$0	$133,900
Cash collections:
April sales	39,800 (199,000*20%)	149,250 (199,000*75%)	7,960 (199,000*4%)	197,010
May sales		61,800 (309,000*20%)	231,750 (309,000*75%)	293,550
June sales			67,800 (339,000*20%)	67,800
Total	$168,300	$216,450	$307,510	$692,260

2.

Cash Budget
	April	May	June	Quarter Total
Beginning cash balance	$29,000	$20,200	$20,950	$29,000
Add: Receipts
Cash collections	168,300	216,450	307,510	692,260
Total cash available	197,300	236,650	328,460	721,260
Less: Payments:
Merchandise purchases	108,300	119,900	169,900	398,100
Payroll	9,500	9,500	9,500	28,500
Lease payments	13,000	13,000	13,000	39,000
Advertising	71,200	73,300	56,600	201,100
Equipment purchases	9,100			9,100
Total cash payments	211,100	215,700	249,000	675,800
Cash excess (deficiency)	-13,800	20,950	79,460	45,460
Financing:
Borrowings	34,000			34,000
Repayments			-34,000	-34,000
Interest			-800	-800
Total financing	34,000		-34,800	-800
Ending cash balance	$20,200	$20,950	$44,660	$44,660