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 $8,240 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,240, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,240 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	$	9,040
Estimated cash sales:
October		13,880
November		29,130
December		44,400
Sales on account:
July (actual)		130,500
August (actual)		104,500
September (actual)		128,500
October (estimated)		134,600
November (estimated)		141,500
December (estimated)		188,800

Projected cash collection of sales on account is estimated to be 69 percent in the month following the sale, 21 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 $13,500 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)	$	120,900
October (estimated)		112,500
November (estimated)		127,600
December (estimated)		95,200

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 $38,000, $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	$	$	$

Answer 1

Friendly Freddie's
Cash Budget
October through December
	October	November	December
Beginning cash balance	9,040	8,276	20,372
Receipts:
Cash sales	13,880	29,130	44,400
Collections of sales on account	126,129	133,611	168,063
Note receivable repayment	13,500
Total cash available	162,549	171,017	232,835
Disbursements:
Payment of inventory purchases	117,273	109,125	92,344
Operating expenses	38,000	40,500	45,800
Loan repayment	0	1,000	0
Interest	0	20	0
Total disbursements	155,273	150,645	138,144
Cash balance	7,276	20,372	94,691
Bank loan	1,000	0	0
Adjusted cash balance	8,276	20,372	94,691

Collection of Sales on Account
	Oct	Nov	Dec
69% in month of Sales	92,874	97,635	130,272
21% in second month	26,985	28,266	29,715
6% in third month	6,270	7,710	8,076
Estimated Collections	126,129	133,611	168,063