Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $57,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. 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 through June, during which the loan will be used:

1. On April 1, the start of the loan period, the cash balance will be $30,800. Accounts receivable on April 1 will total $159,600, of which $136,800 will be collected during April and $18,240 will be collected during May. The remainder will be uncollectible.

2. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

	April		May		June
Sales (all on account)	$	368,000	$	612,000	$	345,000
Merchandise purchases	$	272,000	$	180,000	$	146,000
Payroll	$	31,200	$	31,200	$	26,200
Lease payments	$	33,600	$	33,600	$	33,600
Advertising	$	64,800	$	64,800	$	62,260
Equipment purchases	$	−		−		115,000
Depreciation	$	15,200	$	15,200	$	15,200

3. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $179,000.

4. In preparing the cash budget, assume that the $57,000 loan will be made in April and repaid in June. Interest on the loan will total $920.

Calculate the following:

(1) Total cash collections for April, May, June, and the quarter

(2) Fill in the following:

Prime Products Cash Budget April May June Quarter Beginning cash balance Add receipts: Collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases Payroll Lease payments Advertising Equipment purchases Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings Repayments Interest Total financing 0 0 0 Ending cash balance $0 $0 $0 $0

Answer 1

1)	Schedule of Expected cash collections
				April	May	June	Quarter
	From accounts receivable			136,800	18,240		155,040
	Fro April sales			110400	220800	29440	360640
	From May sales				183600	367200	550800
	From June sales					103500	103500
	Total cash collections			247,200	422,640	500140	1,169,980
2)			Cash budget
				April	May	June	Quarter
	Beginning cash balance			30,800	26,400	47,440	30,800
	Add receipts:
	Collections from customers			247,200	422,640	500140	1,169,980
	Total cash available			278,000	449040	547,580	1,200,780
	less Cash disbursement
	Merchandise purchases			179,000	272,000	180,000	631,000
	payroll			31,200	31,200	26,200	88,600
	lease payments			33,600	33,600	33,600	100,800
	Advertising			64,800	64,800	62,260	191,860
	Equipment purchases			0	0	115,000	115,000
	total cash disbursement			308,600	401,600	417,060	1,127,260
	Excess(deficiency)			-30,600	47,440	130,520	73,520
	Financing:
	Borrowings			57,000	0	0	57,000
	Repayments			0	0	-57,000	-57,000
	interest			0	0	-920	-920
	Total financing			57,000	0	-57920	-920
	Ending cash balance			26,400	47,440	72,600	72,600