Question

Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:

  

a.	On July 1, the beginning of the third quarter, the company will have a cash balance of $43,500.

b.

Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):   May (actual) $ 210,000   June (actual) $ 250,000   July (budgeted) $ 370,000   August (budgeted) $ 590,000   September (budgeted) $ 305,000 Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.     c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below: July August September   Merchandise purchases $ 222,000 $ 354,000 $ 183,000   Salaries and wages $ 38,500 $ 45,000 $ 46,000   Advertising $ 135,000 $ 117,500 $ 86,000   Rent payments $ 6,000 $ 6,000 $ 6,000   Depreciation $ 6,250 $ 6,250 $ 6,250 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $150,000. d. Equipment costing $10,000 will be purchased for cash during July. e. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.     Required: PART1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. Herbal Care Corp. Schedule of Expected Cash Collections July August September Quarter From accounts receivable: May sales $0 June sales 0 From budgeted sales: July sales 0 August sales 0 September sales 0 Total cash collections $0 $0 $0 $0 PART2. Prepare a cash budget, by month and in total, for the third quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Herbal Care Corp. Cash Budget July August September Quarter Beginning cash balance Add receipts: Collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases Salaries and wages Advertising Rent payments Equipment purchases Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings Repayments Interest Total financing 0 0 0 Ending cash balance $0 $0 $0 $0

Answer 1

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Herbal Care Corp.
Schedule of Expected Cash Collections
	July	August	September	Quarter
From accounts receivable:
May sales	630			630
June sales	175000	7500		182500
From budgeted sales:
July sales	92500	259000	11100	362600
August sales		147500	413000	560500
September sales			76250	76250
Total cash collections	268130	414000	500350	1182480
Percentage Collection	25%	70%	3%
		25%	70%
			25%
Herbal Care Corp.
Cash Budget
	July	August	September	Quarter
Beginning cash balance	43500	12130	35630	43500
Add receipts: Collections from customers	268130	414000	500350	1182480
Total cash available	311630	426130	535980	1225980
Less cash disbursements:
Merchandise purchases	150000	222000	354000	726000
Salaries and wages	38500	45,000	46000	129500
Advertising	135000	117500	86000	338500
Rent payments	6000	6000	6000	18000
Equipment purchases	10000			10000
Total cash disbursements	339500	390500	492000	1222000
Excess (deficiency) of cash available over disbursements	-27870	35630	43980	3980
Financing:
Borrowings	40000			40000
Repayments			-40000	-40000
Interest			-1200	-1200
Total financing	40000		-41200	-1200
Ending cash balance	12130	35630	2780	2780