Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:

On April 1, the start of the loan period, the cash balance will be $30,800. Accounts receivable on April 1 will total $195,300, of which $160,000 will be collected during April and $28,800 will be collected during May. The remainder will be uncollectible.

Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

April May June
Sales (all on account) $ 368,000 $ 512,000 $ 345,000
Merchandise purchases $ 272,000 $ 180,000 $ 146,000
Payroll $ 31,200 $ 31,200 $ 26,200
Lease payments $ 33,600 $ 33,600 $ 33,600
Advertising $ 64,800 $ 64,800 $ 62,260
Equipment purchases $ ? ? 115,000
Depreciation $ 15,200 $ 15,200 $ 15,200

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $179,000.

In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $920.

Required:

1. Calculate the expected cash collections for April, May, and June, and for the three months in total.

2. Prepare a cash budget, by month and in total, for the three-month period.

Answer 1

Solution

Prime Products

Cash budget for the quarter ending June –

	Cash Budget
	April	May	June	Total
Beginning Balance	$30,800	$22,600	$24,200
Bank Loan	$30,000
Collections from customers	$270,400	$403,200	$440,140	$1,113,740
Available cash balance	$331,200	$425,800	$464,340
Cash disbursements:
Merchandise purchases	$179,000	$272,000	$180,000	$631,000
Payroll	$31,200	$31,200	$26,200	$88,600
Lease payments	$33,600	$33,600	$33,600	$100,800
Advertising	$64,800	$64,800	$62,260	$191,860
Equipment Purchases			$115,000	$115,000
total disbursements	$308,600	$401,600	$417,060	$1,127,260
Excess/(deficiency) of available cash over disbursements	$22,600	$24,200	$47,280	$94,080
Financing:
Loan repayments			($30,000)	($30,000)
interest			($920)	($920)
ending cash balance	$22,600	$24,200	$16,360	77,720

Schedule of collections from customers:

Collections from Customers	April	May	June	Total
Accounts Receivable collected	$160,000	$28,800		$188,800
Collections from April Sales	$110,400	$220,800	$29,440	$360,640
Collections from May Sales		$153,600	$307,200	$460,800
Collections from June Sales			$103,500	$103,500
Total collections	$270,400	$403,200	$440,140	$1,113,740