Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $89,000, 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:

A. On April 1, the start of the loan period, the cash balance will be $33,400. Accounts receivable on April 1 will total $173,600, of which $148,800 will be collected during April and $19,840 will be collected during May. The remainder will be uncollectible.

B. 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) $ 302,000 $ 518,000 $ 277,000 Merchandise purchases $ 206,000 $ 134,500 $ 149,000 Payroll $ 29,800 $ 29,800 $ 24,500 Lease payments $ 28,200 $ 28,200 $ 28,200 Advertising $ 73,600 $ 73,600 $ 43,680 Equipment purchases $ − − 98,000 Depreciation $ 20,800 $ 20,800 $ 20,800

C. 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 $160,500.

D. In preparing the cash budget, assume that the $89,000 loan will be made in April and repaid in June. Interest on the loan will total $1,240.

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
Cash collections from credit sales:
From Accounts Receivable	$148,800	$19,840		$168,640
From April sales ($302,000*30/100); ($302,000*60/100); ($302,000*8/100)	$90,600	$181,200	$24,160	$295,960
From May sales ($518,000*30/100); ($518,000*60/100)		$155,400	$310,800	$466,200
From June sales ($277,000*30/100)			$83,100	$83,100
Total cash collections from credit sales	$239,400	$356,440	$418,060	$1,013,900
2) Cash Budget
	April	May	June	Total
Beginning cash balance	$33,400	$69,700	$88,540	$191,640
Add: Cash collections from credit sales	$239,400	$356,440	$418,060	$1,013,900
Total cash available	$272,800	$426,140	$506,600	$1,205,540
Less: Cash disbursements:
Cash payments for merchandise purchases	($160,500)	($206,000)	($134,500)	($501,000)
Payroll	($29,800)	($29,800)	($24,500)	($84,100)
Lease payments	($28,200)	($28,200)	($28,200)	($84,600)
Advertising	($73,600)	($73,600)	($43,680)	($190,880)
Equipment purchases			($98,000)	($98,000)
Preliminary cash balance	($19,300)	$88,540	$177,720	$246,960
Financing:
Borrowings	$89,000	$0	$0	$89,000
Repayments	$0	$0	($89,000)	($89,000)
Interest on Loan	$0	$0	($1,240)	($1,240)
Ending cash balance	$69,700	$88,540	$87,480	$245,720