Question

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 $8,120 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,120, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,120 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	$	8,850
Estimated cash sales:
October		13,930
November		29,410
December		43,580
Sales on account:
July (actual)		130,300
August (actual)		104,200
September (actual)		127,500
October (estimated)		135,000
November (estimated)		141,100
December (estimated)		187,900

Projected cash collection of sales on account is estimated to be 72 percent in the month following the sale, 18 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 $13,200 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)	$	120,900
October (estimated)		112,400
November (estimated)		128,300
December (estimated)		94,100

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 $37,500, $40,600, and $46,100, 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

Friendly Freddie's
Cash Budget
October through December
	October	November	December
Beginning Cash Balance	$8,850	$8,850	$8,850
Add: Receipts:
Cash sales	$13,930	$29,410	$43,580
Collection of sales on account (see note)	$119,677	$127,444	$134,817
Note receivable repayment	$13,200	-	-
Total Cash Available (a)	$155,657	$165,704	$187,247
Less: Disbursements:
Payment of Inventory Purchases (see note)	($117,273)	($109,028)	($124,451)
Operating Expenses	($37,500)	($40,600)	($46,100)
Loan Repayment ($165,704 - $109,028 - $40,600 - $159.32 - $8,850); ($7,966 - $7,066.68)	$0	($7,067)	($899)
Interest ($7,966*2/100); ($899.32*2/100)	$0	($159.32)	($17.99)
Total Disbursements (b)	($154,773)	($156,854)	($171,468)
Cash Balance (a - b)	$884	$8,850	$15,779
Bank Loan ($8,850 - $884); ($7,966 - $7,066.68)	$7,966	$0.00	$0
Adjusted Cash Balance	$8,850	$8,850	$15,779

Working Notes:	October	November	December
Cash collections:
From July Credit Sales ($130,300*7/100)	$9,121
From August Credit Sales ($104,200*18/100); ($104,200*7/100)	$18,756	$7,294
From September Credit Sales ($127,500*72/100); ($127,500*18/100); ($127,500*7/100)	$91,800	$22,950	$8,925
From October Credit Sales ($135,000*72/100); ($135,000*18/100)		$97,200	$24,300
From November Credit Sales ($141,100*72/100)			$101,592
Total Cash Collections from Credit Sales	$119,677	$127,444	$134,817
Working Notes:	October	November	December
Cash Payments:
From September Credit Purchases ($120,900 - 3/100*$120,900)	$117,273
From October Credit Purchases ($112,400 - 3/100*$112,400)		$109,028
From November Credit Purchases ($128,300 - 3/100*$128,300)			$124,451
Total Payments of Inventory Purchase	$117,273	$109,028	$124,451