The president of the retailer Prime Products has just approached the company’s b
ID: 2598350 • 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 $38,000. Accounts receivable on April 1 will total $159,500, of which $122,000 will be collected during April and $32,600 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:
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 $170,500.
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 $1,020.
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.
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.)
Calculate the expected cash collections for April, May, and June, and for the three months in total.
Calculate the expected cash collections for April, May, and June, and for the three months in total.
April May June Sales (all on account) $ 452,000 $ 544,000 $ 323,000 Merchandise purchases $ 328,000 $ 242,000 $ 177,500 Payroll $ 31,000 $ 31,000 $ 19,200 Lease payments $ 34,600 $ 34,600 $ 34,600 Advertising $ 69,400 $ 69,400 $ 27,680 Equipment purchases $ 113,000 Depreciation $ 24,800 $ 24,800 $ 24,800Explanation / Answer
Prime Products
Total cash collections:
April
May
June
Total
Cash collections:
March collections
$122,000
$32,600
$154,600
April collections
$135,600
$271,200
$36,160
$442,960
May collections
$163,200
$326,400
$489,600
June Collections
$96,900
$96,900
Total cash collections
$257,600
$467,000
$459,460
$1,184,060
Prime Products
Cash Budget
April
May
June
Quarter
Beginning Cash Balance
$38,000
$20,100
$24,100
$82,200
Add: Receipts:
Collections from customers
$257,600
$467,000
$459,460
$1,184,060
Total cash available
$295,600
$487,100
$483,560
$1,266,260
Less: Cash disbursements:
Merchandise purchases
$170,500
$328,000
$242,000
$740,500
Payroll
$31,000
$31,000
$19,200
$81,200
Lease payments
$34,600
$34,600
$34,600
$103,800
Advertising
$69,400
$69,400
$27,680
$166,480
Equipment purchases
$113,000
$113,000
Total cash disbursements
$305,500
$463,000
$436,480
$1,204,980
Excess (deficiency) of cash available over disbursements
($9,900)
$24,100
$47,080
$61,280
Financing:
Borrowings
$30,000
Repayments
($30,000)
Interest
($1,020)
Total financing
$30,000
($31,020)
Ending Cash Balance
$20,100
$24,100
$16,060
April
May
June
Total
Cash collections:
March collections
$122,000
$32,600
$154,600
April collections
$135,600
$271,200
$36,160
$442,960
May collections
$163,200
$326,400
$489,600
June Collections
$96,900
$96,900
Total cash collections
$257,600
$467,000
$459,460
$1,184,060
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