Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $83,000, 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 $18,800. Accounts receivable on April 1 will total $165,200, of which $141,600 will be collected during April and $18,880 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)	$	334,000	$	510,000	$	343,000
Merchandise purchases	$	266,000	$	200,000	$	176,500
Payroll	$	19,000	$	19,000	$	18,800
Lease payments	$	27,800	$	27,800	$	27,800
Advertising	$	70,400	$	70,400	$	57,890
Equipment purchases	$	−		−		105,500
Depreciation	$	23,000	$	23,000	$	23,000

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 $149,000.

4. In preparing the cash budget, assume that the $83,000 loan will be made in April and repaid in June. Interest on the loan will total $1,180.

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.

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

Answer 1

(1)

	April	May	June	Quarter
From accounts receivable	$141,600	$18,880		160480
From April sales	100200	200400	26720	327320
From May sales		153000	306000	459000
From June sales			102900	102900
Total cash collections	$ 241,800	$ 372,280	$ 435,620	$ 1,049,700

(2)

	April	May	June	Quarter
Beginning cash Balance	$18,800	$77,400	$66,480	$18,800
Add receipts:
Collection from customers	$241,800	$372,280	$435,620	$1,049,700
Total cash available	$260,600	$449,680	$502,100	$1,068,500
Less cash disbursements:
Merchandise purchases	$149,000	$266,000	$200,000	$615,000
Payroll	$19,000	$19,000	$18,800	$56,800
Lease Payments	$27,800	$27,800	$27,800	$83,400
Advertising	$70,400	$70,400	$57,890	$198,690
Equipment purchases			$105,500	$105,500
Total Cash disbursements	$266,200	$383,200	$409,990	$1,059,390
Excess (defeciency) of cash available over disbursements	($5,600)	$66,480	$92,110	$9,110
Financing:
Borrowings	$83,000	$0		$83,000
Repayments	$0	$0	($83,000)	($83,000)
Interest	$0	$0	($1,180)	($1,180)
Total financing	$83,000	$0	($84,180)	($1,180)
Ending cash balance	$    77,400	$    66,480	$      7,930	$          7,930