Question

Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank in late 2019 seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash receipts and disbursements. He was also told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.

Since the treasurer is unsure as to the particular quarters in which the bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget:

a.	Budgeted sales and merchandise purchases for the year 2020, as well as actual sales and purchases for the last quarter of 2019, are as follows:

	Sales	Merchandise Purchases
2019:
Fourth-quarter actual	$ 500,000	$ 315,000
2020:
First-quarter estimated	750,000	465,000
Second-quarter estimated	1,000,000	620,000
Third-quarter estimated	1,250,000	762,500
Fourth-quarter estimated	500,000	315,000

b.	The company normally collects 65% of a quarter’s sales before the quarter ends and another 33% in the following quarter. The remainder are uncollectible. This pattern of collections is now being experienced in the 2019 fourth-quarter actual data.
c.	80% of a quarter’s merchandise purchases are paid for within the quarter. The remainder are paid in the following quarter.
d.	Operating expenses for the year 2020 are budgeted quarterly at $125,000 plus 15% of sales. Of the fixed amount, $50,000 each quarter is depreciation.
e.	The company will pay $25,000 in dividends each quarter.
f.	Equipment purchases of $187,500 will be made in the second quarter, and purchases of $120,000 will be made in the third quarter. These purchases will be for cash.
g.	The cash account contained $25,000 at the end of 2019. The treasurer feels that this represents a minimum balance that must be maintained.
h.	Any borrowing will take place at the beginning of a quarter, and any repayments will be made at the end of a quarter at an annual interest rate of 10%. Interest is paid only when the principal is repaid. All borrowings and all repayments of the principal must be in round $1,000 amounts. Interest payments can be in any amount. (Compute interest on whole months, e.g., 1/12, 2/12.)
i.	At present, the company has no loans outstanding.

Required:

1.	Prepare the following by quarter and in total for the year 2020:

a.	A schedule of expected cash collections.

            

b.	A schedule of budgeted cash disbursements for merchandise purchases.

            

2.	Compute the expected cash payments for operating expenses, by quarter and in total, for the year 2020.

     

3.	Prepare a cash budget, by quarter and in total, for the year 2020. In your budget, clearly show the quarter(s) in which borrowing will be necessary and the quarter(s) in which repayments can be made, as requested by the company’s bank. (Roundup "Borrowing" and "Repayments" answers to the nearest whole dollar amount. Any "Repayments" and "Interest" should be indicated by a minus sign.)

     

Answer 1

Cash budget