The president of the retailer Prime Products has just approached the company’s b
ID: 2585922 • Letter: T
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 $37,000. Accounts receivable on April 1 will total $175,150, of which $150,000 will be collected during April and $19,000 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% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $172,500.
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 $940.
Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total.
Prepare a cash budget, by month and in total, for the three-month period. (Cash deficiency, repayments and interest should be indicated by a minus sign.)
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:
Explanation / Answer
Cash Budget April May June Quarter Beginning cash balance 37,000 23,700 27,300 37,000 Add receipts: Collections from customers 2,76,600 4,21,000 4,32,460 11,30,060 Total cash available 3,13,600 4,44,700 4,59,760 11,67,060 Less cash disbursements: Merchandise purchases 1,72,500 2,70,000 2,03,500 6,46,000 Payroll 28,400 28,400 25,300 82,100 Lease payments 40,800 40,800 40,800 1,22,400 Advertising 78,200 78,200 65,880 2,22,280 Equipment purchases 76,000 76,000 Total cash disbursements 3,19,900 4,17,400 4,11,480 11,48,780 Excess (deficiency) of cash available over disbursements -6,300 27,300 48,280 18,280 Financing: Borrowings 30000 30,000 Repayments -30000 -30,000 Interest -940 -940 Total financing 30000 0 -30940 -940 Ending cash balance 23,700 27,300 17,340 17,340 Assumed all expenses other than merchandise paid in the month of incurring Prime Products Schedule of Expected Cash Collections March April May June Quarter Sales 4,22,000 4,96,000 3,37,000 12,55,000 From accounts receivable 175150 1,50,000 19,000 1,69,000 From April sales 1,26,600 2,53,200 33,760 4,13,560 From May sales 1,48,800 2,97,600 4,46,400 From June sales 1,01,100 1,01,100 Total cash collections 2,76,600 4,21,000 4,32,460 11,30,060
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