Question

In: Accounting

The president of the retailer Prime Products has just approached the company’s bank with a request...

The president of the retailer Prime Products has just approached the company’s bank with a request for a $77,000, 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:

  1. On April 1, the start of the loan period, the cash balance will be $36,600. Accounts receivable on April 1 will total $187,600, of which $160,800 will be collected during April and $21,440 will be collected during May. The remainder will be uncollectible.

  2. 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) $ 330,000 $ 550,000 $ 307,000
Merchandise purchases $ 253,000 $ 207,000 $ 143,000
Payroll $ 26,800 $ 26,800 $ 18,500
Lease payments $ 32,600 $ 32,600 $ 32,600
Advertising $ 71,400 $ 71,400 $ 85,420
Equipment purchases $ 80,000
Depreciation $ 29,800 $ 29,800 $ 29,800
  1. 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 $167,500.

  2. In preparing the cash budget, assume that the $77,000 loan will be made in April and repaid in June. Interest on the loan will total $1,120.

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.

Solutions

Expert Solution

1.Expected cash collections
April May June Total
Accounts receivables       160,800       21,440       182,240
30% in the month of sale               99,000          165,000           92,100       356,100
60% in following month          198,000        330,000       528,000
8% in second month           26,400         26,400
Total expected collections             259,800          384,440        448,500          1,092,740
2.Cash Budget
April May June Total
Beginning Cash balance 36600 75100 75740 36600
Add: Collections             259,800          384,440        448,500          1,092,740
Cash Available 296400 459540 524240 1129340
Less: Disbursements
Purchases 167500 253000 207000 627500
Payroll 26800 26800 18500 72100
Lease Payments 32600 32600 32600 97800
Advertising 71400 71400 85420 228220
Equipment purchases 0 0 80000 80000
Total Disbursements 298300 383800 423520 1105620
Excess of cash available -1900 75740 100720 23720
Loan/(Repayment) 77000 0 -77000 0
Interest 0 0 -1120 -1120
Ending Cash Balance 75100 75740 22600 22600
Note: Depreciation is a non cash expense

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