Question

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

3. 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.

4. 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.

Answer 1

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