The president of the retailer Prime Products has just approached the company\'s

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 a. On April 1, the start of the loan period, the cash balance will be $30,800. Accounts receivable on April 1 will total $195,300, of which $160,000 will be collected during April and $28,800 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 $368,000 512,000 345,000 $272,000 180,000 146,000 $ 31,200 31,200 $ 26,200 $ 33,600 33,600 33,600 $ 64,800 64,800 62,260 une Sales (all on account) Merchandise purchases Payroll Lease payments Advertising Equipment purchases Depreciation 115,000 $ 15,200 $ 15,200 15,200 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 $179,000. d. 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 $920

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1. Expected Cash Collections April May June Quarter Collection against opening Receivable 160000 28800 188800 Collection against April Sale 110400 220800 29440 360640 Collection against May Sale 0 153600 307200 460800 Collection against June Sale 0 0 103500 103500 Total Cash Collection 270400 403200 440140 1113740 2. Cash Budget April May June Quarter Beginning Cash Balance 30800 22600 24200 30800 Add receipts: -Collection from Customers (From-1) 270400 403200 440140 1113740 Total Cash Available 301200 425800 464340 1144540 Less: Cash Disbursment -Merchandise Purchase 179000 272000 180000 631000 -Payroll 31200 31200 26200 88600 -Lease Payment 33600 33600 33600 100800 -Advertising 64800 64800 62260 191860 -Equipment Purchase 0 0 115000 115000 Total Cash Disbursment 308600 401600 417060 1127260 Excess/(Deficiency) of cash -7400 24200 47280 17280 Financing: -Borrowing 30000 30000 -Repayment 30000 30000 -Interest 920 920 Total Financing 30000 0 30920 60920 Ending Cash Balance 22600 24200 78200 78200

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