Question

1. Cash Budget

   Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bank requires that a minimum balance of $8,100 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,100, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,100 at month-end.

   Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans.

   The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year.

   Estimated beginning cash balance	$	8,810
   Estimated cash sales:
   October		13,750
   November		29,010
   December		44,210
   Sales on account:
   July (actual)		130,200
   August (actual)		103,500
   September (actual)		128,800
   October (estimated)		134,300
   November (estimated)		141,100
   December (estimated)		188,700

   Projected cash collection of sales on account is estimated to be 68 percent in the month following the sale, 22 percent in the second month following the sale, and 7 percent in the third month following the sale. The 3 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,500 cash on a note receivable in October.

   All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available.

   Inventory Purchases
   September (actual)	$	120,200
   October (estimated)		111,600
   November (estimated)		128,100
   December (estimated)		95,400

   Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $37,900, $40,700, and $46,200, respectively.

   Required:

   Prepare Friendly Freddie’s cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. (CMA adapted). Enter all cash disbursements as positive values. If a cash balance is negative, enter the amount as a negative value. If an amount is zero, enter "0".

   Friendly Freddie's
   Cash Budget
   October through December
   	October	November	December
   Beginning cash balance	$	$	$
   Receipts:
   Cash sales
   Collections of sales on account
   Note receivable repayment
   Total cash available	$	$	$
   Disbursements:
   Payment of inventory purchases	$	$	$
   Operating expenses
   Loan repayment
   Interest
   Total disbursements	$	$	$
   Cash balance	$	$	$
   Bank loan
   Adjusted cash balance	$	$	$

Answer 1

Note: Inventory payment has been calculated after deducting 3% cash discount.