Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $67,000, 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 $18,000. Accounts receivable on April 1 will total $173,600, of which $148,800 will be collected during April and $19,840 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)	$	452,000	$	544,000	$	323,000
Merchandise purchases	$	328,000	$	242,000	$	177,500
Payroll	$	31,000	$	31,000	$	19,200
Lease payments	$	34,600	$	34,600	$	34,600
Advertising	$	69,400	$	69,400	$	27,680
Equipment purchases	$	−		−		113,000
Depreciation	$	24,800	$	24,800	$	24,800

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 $170,500.

4. In preparing the cash budget, assume that the $67,000 loan will be made in April and repaid in June. Interest on the loan will total $1,020.

Required:

1. Calculate the expected cash collections for April, May, and June, and for the three months in total.

2. Prepare a cash budget, by month and in total, for the three-month period.

Answer 1

Expected Cash collections:
	April	May	June	Total
March Sales	148,800	19,840		168,640
April Sales	135,600	271,200	36,160	442,960
May Sales		163,200	326,400	489,600
June Sales			96,900	96,900
Cash Collections	284,400	454,240	459,460	1,198,100
2.Cash Budget
	April	May	June	Total
Beginning Cash Balance	18,000	63,900	55,140	18,000
Add: Collections	284,400	454,240	459,460	1,198,100
Cash available	302,400	518,140	514,600	1,216,100
Less: Payments
Purchases	170,500	328,000	242,000	740,500
Payroll	31,000	31,000	19,200	81,200
Lease	34,600	34,600	34,600	103,800
Advertising	69,400	69,400	27,680	166,480
Equipment Purchase			113,000	113,000
Total Disbursements	305,500	463,000	436,480	1,204,980
Excess/Deficiency	-3,100	55,140	78,120	11,120
Financing
Borrowing	67,000			67,000
Repayment			-67,000	-67,000
Interest			-1,020	-1,020
Total Financing	67,000	0	-68,020	-1,020
Ending Cash Balance	63,900	55,140	10,100	10,100
Note: Depreciation is a non-cash expense and hence is not taken into cash budget