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 $8,120 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,120, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,120 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	$	8,870
Estimated cash sales:
October		13,530
November		29,380
December		43,860
Sales on account:
July (actual)		129,700
August (actual)		103,800
September (actual)		128,200
October (estimated)		135,500
November (estimated)		142,300
December (estimated)		187,900

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 8 percent in the third month following the sale. The 2 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,400 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)		112,200
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, $41,300, 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	$          8,870.00	$            8,659.00	$          8,466.00
Receipts:
Cash sales	$       13,530.00	$         29,380.00	$        43,860.00
Collections of sales on account            ( Refer Working Note 1)	$    1,20,632.00	$      1,28,721.00	$    1,36,898.00
Note receivable repayment	$       13,400.00	$                         -	$                       -
Total cash available	$1,56,432.00	$ 1,66,760.00	$1,89,224.00
Disbursements:
Payment of inventory purchases            ( Refer Working Note 2)	$    1,17,273.00	$      1,08,834.00	$    1,23,772.00
Operating expenses	$       38,500.00	$         41,300.00	$        45,800.00
Loan repayment***	$                       -	$            8,000.00	$                       -
Interest*** ( @ 2%)	$ -	$ 160.00	$ -
Total disbursements	$1,55,773.00	$ 1,58,294.00	$1,69,572.00
Cash balance*	$        659.00	$      8,466.00	$   19,652.00
Bank loan**	$          8,000.00	$                         -	$                       -
Adjusted cash balance	$     8,659.00	$      8,466.00	$   19,652.00
*Cash Balance= Beginning cash bal + recipt- payment
** Since the Cash balance is $ 659 which is less than $ 8120, so bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,120 at month-end.Accordingly $ 8000 has been extended as credit.
*** Since it is informed that Interest payments and any principal payments are paid at the end of the month following the loan so $ 8000 borrowed in October has been repaid at the end of November along with Interest @ 2 % for the month.

Working Note:

1.

	Amount received in
Particulars	July	August	September	October	November	December
Credit Sales	129700	103800	128200	135500	142300	187900
Amount received of:-
69% of Last month		89493	71622	88458	93495	98187
21 % of Last to last month			27237	21798	26922	28455
8 % of third last month				10376	8304	10256
Total Cash Collection				$   1,20,632.00	$   1,28,721.00	$ 1,36,898.00

2.

	Amount paid in
Particulars	September	October	November	December
Purchases on account	120900	112200	127600	94400
Cash Discount @ 3%	3627	3366	3828	2832
Amount payable after Cash Discount	117273	108834	123772	91568
Amount payable in the next month		$ 1,17,273.00	$1,08,834.00	$   1,23,772.00