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 $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:

  1. On April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 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) $ 300,000 $ 400,000 $ 250,000
Merchandise purchases $ 210,000 $ 160,000 $ 130,000
Payroll $ 20,000 $ 20,000 $ 18,000
Lease payments $ 22,000 $ 22,000 $ 22,000
Advertising $ 60,000 $ 60,000 $ 50,000
Equipment purchases $ 65,000
Depreciation $ 15,000 $ 15,000 $ 15,000
  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 $140,000.

  2. 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 $1,200.

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
April May June Quarter
Beginning receivable collected 120,000 16000 136,000
April's Sales collected 90000 180000 24000 294,000
300000*30% 300000*60% 300000*8%
May Sales collected 120000 240000 360,000
400000*30% 400000*60%
June Sales collected 75000 75,000
250000*30%
210,000 316,000 339,000 865,000
2
Prime Products
Cash Budget
April May June Quarter
Beginning Cash balance 24000 22,000 26,000 24000
Cash Receipts 210,000 316,000 339,000 865,000
Total cash available 234,000 338,000 365,000 889,000
Less: Cash disbursments
Merchandise purchase 140,000 210000 160000 510,000
Payroll 20000 20000 20000 60,000
Lease payment 22000 22000 22000 66,000
Advertising 60000 60000 60000 180,000
Equipment purchase 65000 65,000
Total Cash disbursements 242,000 312,000 327,000 881,000
Excess(Deficit) Cash balance -8,000 26,000 38,000 8,000
Financing
Borrowings 30000 0 0 30,000
Repayments 0 0 -30000 -30,000
Interest 0 0 -1200 -1,200
Total Financing 30000 0 -31200 -1,200
Ending cash balance 22,000 26,000 6,800 6,800

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