Question

Aztec Company sells its product for $170 per unit. Its actual and budgeted sales follow. Units Dollars April (actual) 5,500 $ 935,000 May (actual) 4,000 680,000 June (budgeted) 5,500 935,000 July (budgeted) 7,000 1,190,000 August (budgeted) 3,600 612,000 All sales are on credit. Recent experience shows that 24% of credit sales is collected in the month of the sale, 46% in the month after the sale, 25% in the second month after the sale, and 5% proves to be uncollectible. The product’s purchase price is $110 per unit. 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 20% of the next month’s unit sales plus a safety stock of 180 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,764,000 and are paid evenly throughout the year in cash. The company’s minimum cash balance at month-end is $120,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $120,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 11% interest rate. On May 31, the loan balance is $46,000, and the company’s cash balance is $120,000.

Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.

Answer 1

		Cash budget
				June	July
Beginning balance				120000	125528
Add: Cash receipt from customers			(Note:1)	770950	885700
Total cash available			a	890950	1011228
Less: payments
Cash paid to suppliers			(Note:2)	572000	672320
Selling and administrative expenses			(1764000/12)	147000	147000
Interest expense				422
				(46000*11%*1/12)
Total payments			b	719422	819320
Preliminary cash balance			c=a-b	171528	191908
Minimum cash balance				120000	120000
Financing:
Borrowings				0	0
Repayment				-46000	0
Total financing			d	-46000	0
Ending balance			c+d	125528	191908
Note:1
	Cash receipt from customers
						June	July
Sales					a	935000	1190000
Collection:
24% collected in the month of the sale					a*24%	224400	285600
46% in the month after the sale						312800	430100
						(680000*46%)	(935000*46%)
25% in the second month after the sale						233750	170000
						(935000*25%)	(680000*25%)
Total cash collections						770950	885700