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 $8,170 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,170, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,170 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	$	8,830
Estimated cash sales:
October		13,650
November		29,310
December		43,970
Sales on account:
July (actual)		130,400
August (actual)		103,800
September (actual)		127,100
October (estimated)		135,500
November (estimated)		141,300
December (estimated)		188,700

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 8 percent in the third month following the sale. The 2 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,400 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)		112,500
November (estimated)		128,500
December (estimated)		95,500

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 $38,100, $41,400, and $46,300, 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:	blank	blank	blank
Cash sales
Collections of sales on account
Note receivable repayment		blank	blank
Total cash available	$	$	$
Disbursements:	blank	blank	blank
Payment of inventory purchases	$	$	$
Operating expenses
Loan repayment	blank
Interest	blank
Total disbursements	$	$	$
Cash balance	$	$	$
Bank loan		blank	blank
Adjusted cash balance	$	$	$
blank	blank	blank

Answer 1

Cash Budget
	October	November	December
Beginning Cash	$             8,830	$              8,348	$                  8,567
Add : Cash Receipts
Cash Sales	$           13,650	$           29,310	$               43,970
Collections of sales on account	$        120,162	$         128,574	$             136,178
Note receivable	$           13,400
Total Cash Collections	$        147,212	$         157,884	$             180,148
Total Cash Available	$        156,042	$         166,232	$             188,715
Deduct : Disbursements
For Merchandise purchase	$        116,594	$         109,125	$             124,645
Operating Expenses	$           38,100	$           41,400	$               46,300
Loan Repayment		$              7,000
Interest		$                 140
Total Disbursements	$        154,694	$         157,665	$             170,945
Cash Balance	$             1,348	$              8,567	$               17,770
Bank Loan	$             7,000
Adjusted Cash Balance	$             8,348	$              8,567	$               17,770