Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 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:

On April 1, the start of the loan period, the cash balance will be $38,000. Accounts receivable on April 1 will total $159,500, of which $122,000 will be collected during April and $32,600 will be collected during May. The remainder will be uncollectible.

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

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.

In preparing the cash budget, assume that the $30,000 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

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

?particulars	april	may	june
opening accounts recivable collected	122000	32600	----
loan recived	30000	----	----
sales 30:60:8
april	135600	271200	36160
may	----	163200	326400
june	----	----	96900
total	?287600	467000	?459460

Particulars	Amount $
april	287600
may	467000
june	459460
total	?1214060

Note:

??opening cash balance in april 1st = 38000$ is not considerd because it is already collected.

2. statement showing cash budget, by month and in total, for the three-month period.

particulars	april$	may$	june$
opening cash balance	38000	20100	24100
cash collections
loan recived	30000	-----	------
accounts recivable collected	122000	32600	-----
sales collection ratio (30:60:8)
april	135600	271200	36160
may	--------	163200	326400
june	--------	-------	96900
Total	325600	487100	483560
(-)cash disbursments
Merchandise purchases	170500	328,000	242,000
Payroll	31000	31000	19200
Lease payments	34600	34600	34600
Advertising	69400	69400	27,680
Equipment purchases	-----	-----	113,000
loan repaid	------	------	30000
intrest on loan paid	-------	-------	1020
closeing cash balance	20100	24100	16060

note:

• except mechandise purchases all expenses are paid in the month in which they are incuured
• depreciation is not a cash out flow ?

PARTICULARS	AMOUNT$
Opening balance apr1st	38000
+cash collections apr-june	1214060
(-)cash payments apr-june	1236000
closeing cash balance june 30th	16060