Question

Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:

1. On July 1, the beginning of the third quarter, the company will have a cash balance of $53,000.
2. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):

May (actual)	$	400,000
June (actual)	$	440,000
July (budgeted)	$	560,000
August (budgeted)	$	770,000
September (budgeted)	$	395,000

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.   

   

3. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

	July				August				September
Merchandise purchases	$	336,000			$	462,000			$	237,000
Salaries and wages	$	43,000			$	63,000			$	64,000
Advertising	$	225,000			$	144,500			$	104,000
Rent payments	$	9,600			$	9,600			$	9,600
Depreciation	$	10,750			$	10,750			$	10,750

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $264,000.

4. Equipment costing $10,000 will be purchased for cash during July.
5. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.

  

Required:

1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total.

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

Answer 1

Schedule of expected cash collections
	July	August	September	Total
25% in the same month	140,000	192,500	98,750	431,250
70% in following month	308,000	392,000	539,000	1,239,000
3% in second month following sale	12,000	13,200	16,800	42,000
Expected cash collections	460,000	597,700	654,550	1,712,250
Cash budget
	July	August	September	Total
Beginning Cash Balance	53,000	1,400	46,000	53,000
Add: Expected Cash Collections	460,000	597,700	654,550	1,712,250
Total cash available	513,000	599,100	700,550	1,765,250
Less: Cash Disbursements
Merchandise purchases	264,000	336,000	462,000	1,062,000
Salaries and wages	43,000	63,000	64,000	170,000
Advertising	225,000	144,500	104,000	473,500
Rent payments	9,600	9,600	9,600	28,800
Equipment purchase	10,000	-	-	10,000
Total disbursements	551,600	553,100	639,600	1,744,300
Excess of cash available over disbursenments	(38,600)	46,000	60,950	20,950
Loan	40,000	-	(40,000)	-
Interest	-	-	(1,200)	(1,200)
Ending cash balance	1,400	46,000	19,750	19,750