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: 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. 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 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. 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. The expected cash collections for April, May, and June are as follows:

                                               April            May             June         Total

Accounts receivable       $120,000     $16,000                          $136,000

Month of sale (30%)           90,000     120,000       $75,000      285,000

Ffg month (60%)                                  180,000       240,000      420,000

Second month (8%)                                                    24,000        24,000

Total collections           $210,000  $316,000     $339,000   $865,000

2. The Prime Products's Cash Budget is as follows:

                                              April            May             June            Total

Beginning cash balance    $24,000     $22,000      $26,000     $24,000

Bank Loan                          $30,000                                              $30,000

Total collections               $210,000    $316,000   $339,000    $865,000

Total receipts                   $264,000   $338,000   $365,000     $919,000

Total disbursements       $242,000    $312,000    $315,000    $869,000

Bank Loan + Interest Repayment                              $31,200       $31,200

Ending cash balance      $22,000     $26,000      $18,800       $18,800

Data and Calculations:

Requested bank loan = $90,000

Loan period = 90 days

                                               April            May             June         Total

Beginning cash balance    $24,000

Accounts receivable        $140,000

Budgeted Sales              $300,000  $400,000    $250,000    $950,000

Cash Collections:

Accounts receivable       $120,000     $16,000                          $136,000

Month of sale (30%)           90,000     120,000       $75,000      285,000

Ffg month (60%)                                  180,000       240,000      420,000

Second month (8%)                                                    24,000        24,000

Total collections          $210,000   $316,000     $339,000   $865,000

Merchandise purchases $ 210,000 $ 160,000   $ 130,000

Depreciation $ 15,000 $ 15,000 $ 15,000

Cash Disbursements:

                                                     April            May             June

Payment for purchases          $140,000  $210,000     $160,000

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

Total cash disbursements $242,000   $312,000     $315,000

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