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 $8,200 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,200 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	$ 8,800
Estimated cash sales:
October	14,000
November	29,000
December	44,000
Sales on account:
July (actual)	130,000
August (actual)	104,000
September (actual)	128,000
October (estimated)	135,000
November (estimated)	142,000
December (estimated)	188,000

Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 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)	$120,000
October (estimated)	112,000
November (estimated)	128,000
December (estimated)	95,000

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 $38,000, $41,000, and $46,000, 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.

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

	Oct	Nov	Dec
Opening Cash	8,800	8,600	9,120
Cash Recipts
Cash Sales	14,000	29,000	44,000
Cash Collection on Credit Sales	118,200	126,340	134,080
Cash on a note receivable	13,000
	145,200	155,340	178,080
Cash Payments
Purchase	(116,400)	(108,640)	(124,160)
Operating expenses	(38,000)	(41,000)	(46,000)
	(154,400)	(149,640)	(170,160)
Bank Loan	9,000	-	-
Interest on Bank Loan @ 2% on Balance loan	-	(180)	(100)
Repayment of Loan	-	(5,000)	(5,000)
Cash at end	8,600	9,120	11,940

	July	Aug	Sep	Oct	Nov	Dec	Jan	Feb	March
Credit Sales	130,000	104,000	128,000	135,000	142,000	188,000
Cash Collection 70% in following month		91,000.00	72,800.00	89,600.00	94,500.00	99,400.00	131,600.00
Cash Collection 20% in following month			26,000.00	20,800.00	25,600.00	27,000.00	28,400.00	37,600.00
Cash Collection 6% in 3rd month				7,800.00	6,240.00	7,680.00	8,100.00	8,520.00	11,280.00
Cash Collected on Credit Sales				118,200.00	126,340.00	134,080.00
	Sep	Oct	Nov	Dec	Jan
Credit Purchases	120,000	112,000	128,000	95,000
Cash Paymeny in following month (After 3% dicount)		116,400.00	108,640.00	124,160.00	92,150.00

Note - There will be no need for using Bank facility since in no month Cash balance falls below $8,200.