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 $42,200. Accounts receivable on April 1 will total $148,700, of which $127,500 will be collected during April and $16,400 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)	$	438,000	$	480,000	$	261,000
Merchandise purchases	$	291,000	$	183,500	$	136,500
Payroll	$	27,400	$	27,400	$	26,100
Lease payments	$	28,600	$	28,600	$	28,600
Advertising	$	70,800	$	70,800	$	75,460
Equipment purchases	$	−		−		67,500
Depreciation	$	19,000	$	19,000	$	19,000

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 $180,500.

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 $1,040.

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:

Part 1 --- Schedule of Expected Cash Collection

Schedule of Expected Cash Collection
	April	May	June	Quarter
Beginning Accounts Receivable	$127,500	$16,400
April Sales	$131,400	$262,800	$35,040
May Sales		$144,000	$288,000
June Sales			$78,300
Total Collections	$258,900	$423,200	$401,340	$1,083,440

Part 2 – Cash Budget

Cash Budget
	April	May	June	Quarter
Beginning cash balance	$42,200	$23,800	$29,200	$42,200
Add: Cash collections (Refer part 1)	$258,900	$423,200	$401,340	$1,083,440
Total cash available	$301,100	$447,000	$430,540	$1,125,640
Less: Cash disbursements
For Merchandise purchases (Paid in next month of sale)	$180,500	$291,000	$183,500	$655,000
For payroll	$27,400	$27,400	$26,100	$80,900
For lease payment	$28,600	$28,600	$28,600	$85,800
For Advertising	$70,800	$70,800	$75,460	$217,060
For Equipment purchase			$67,500	$67,500
Total Cash disbursements	$307,300	$417,800	$381,160	$1,106,260
Excess (deficiency) of cash available over disbursements	-$6,200	$29,200	$49,380	$19,380
Financing
Borrowings	$30,000			$30,000
Repayments			-$30,000	-$30,000
Interest (Refer calculation below)			-$1,040	-$1,040
Total Finiancing	$30,000	$0	-$31,040	-$1,040
Ending Cash Balance	$23,800	$29,200	$18,340	$18,340

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