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 $26,500. Accounts receivable on April 1 will total $193,250, of which $168,000 will be collected during April and $18,400 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)	$	208,000	$	446,000	$	270,000
Merchandise purchases	$	152,000	$	172,500	$	135,000
Payroll	$	24,400	$	24,400	$	19,600
Lease payments	$	23,600	$	23,600	$	23,600
Advertising	$	72,400	$	72,400	$	49,260
Equipment purchases	$	−		−		78,500
Depreciation	$	29,000	$	29,000	$	29,000

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 $142,500.

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 $1,000.

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.

Required 1

Required 2

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

	April May June Quarter Total cash collections

Prepare a cash budget, by month and in total, for the three-month period. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Prime Products Cash Budget April May June Quarter Beginning cash balance Add receipts: Collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases Payroll Lease payments Advertising 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

Schedule of Expected Cash Collection
	April	May	June	Total
From oopening Account Receivable	$168,000.00	$18,400.00		$204,600.00
From April Sale	$62,400.00	$124,800.00	$16,640.00	$203,840.00
From May Sale		$133,800.00	$267,600.00	$401,400.00
From June Sale			$81,000.00	$81,000.00
Total Cash Collection	$230,400.00	$277,000.00	$365,240.00	$890,840.00
CASH BUDGET	April	May	June	Quarter
Begning Cash Balance	$26,500.00	$24,000.00	$28,600.00	$79,100.00
Add: Receipt from Cusatomers	$230,400.00	$277,000.00	$365,240.00	$872,640.00
Total Cash Available	$256,900.00	$301,000.00	$393,840.00	$951,740.00
Less: Cash Disbursement:
Mercandise Purchase	$142,500.00	$152,000.00	$172,500.00	$467,000.00
Payroll	$24,400.00	$24,400.00	$24,400.00	$73,200.00
Lease Payment	$23,600.00	$23,600.00	$23,600.00	$70,800.00
Advertising	$72,400.00	$72,400.00	$72,400.00	$217,200.00
Equipment Purchase			$78,500.00	$78,500.00
Total Cash Disbursement	$262,900.00	$272,400.00	$371,400.00	$906,700.00
Excess/(Deficiet) Cash	($6,000.00)	$28,600.00	$22,440.00	$45,040.00
FINANCING
Borrowing	$30,000.00			$30,000.00
Repayment			($30,000.00)	($30,000.00)
Interest			($1,000.00)	($1,000.00)
Ending Cash Balance	$24,000.00	$28,600.00	($8,560.00)	$44,040.00