Question

The president of the retailer Prime Products has just approached the company’s bank with a request for a $91,000, 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 $15,800. Accounts receivable on April 1 will total $176,400, of which $151,200 will be collected during April and $20,160 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)	$	392,000	$	498,000	$	346,000
Merchandise purchases	$	276,000	$	246,500	$	152,000
Payroll	$	33,400	$	33,400	$	20,300
Lease payments	$	23,200	$	23,200	$	23,200
Advertising	$	76,200	$	76,200	$	45,080
Equipment purchases		−		−	$	70,000
Depreciation	$	33,400	$	33,400	$	33,400

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 $159,000.

4. In preparing the cash budget, assume that the $91,000 loan will be made in April and repaid in June. Interest on the loan will total $1,260.

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
Cash collections from:
Accounts receivable	$151,200	$20,160		$171,360
April sales ($392,000*30/100); ($392,000*60/100); ($392,000*8/100)	$117,600	$235,200	$31,360	$384,160
May sales ($498,000*30/100); ($498,000*60/100)		$149,400	$298,800	$448,200
June sales ($346,000*30/100)			$103,800	$103,800
Total cash collections	$268,800	$404,760	$433,960	$1,107,520

b) Cash Budget
	April	May	June	Quarter
Beginning cash balance	$15,800	$83,800	$79,760	$179,360
Add: Cash collections (see part 1)	$268,800	$404,760	$433,960	$1,107,520
Total cash available (a)	$284,600	$488,560	$513,720	$1,286,880
Less: Cash disbursements:
For material purchases (see note)	$159,000	$276,000	$246,500	$681,500
Payroll	$33,400	$33,400	$33,400	$100,200
Lease payments	$23,200	$23,200	$23,200	$69,600
Advertising	$76,200	$76,200	$45,080	$197,480
Equipment purchases			$70,000	$70,000
Total Cash Disbursements (b)	$291,800	$408,800	$418,180	$1,118,780
Preliminary cash balance (a - b)	($7,200)	$79,760	$95,540	$168,100
Financing:
Borrowings	$91,000	$0	$0	$91,000
Repayments	$0	$0	($91,000)	($91,000)
Interest	$0	$0	($1,260)	($1,260)
Ending Cash Balance	$83,800	$79,760	$3,280	$3,280

Working notes:

Note:	April	May	June	Quarter
Cash payments:
March purchases	$159,000			$159,000
April purchases		$276,000		$276,000
May purchases			$246,500	$246,500
Total cash payments for purchases	$159,000	$276,000	$246,500	$681,500