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:

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

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 $140,000.

4. 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.

Answer 1

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