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 $26,500. Accounts receivable on April 1 will total $193,250, of which $168,000 will be collected during April and $18,400 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 Book the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses forthethree month period follow: Print erences April May June Sales (all on account) $208,000 $446,000 $270,000 Merchandise purchases $152,000 $172,500 $135,000 Payroll Lease payments Advertising Equipment purchases Depreciation 24,400 24,400 19,600 23,600 23,600 23,600 $. 72,400 72,400 $ 49,260 78,500 $ 29,000 29,00e 29,000 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 $142,500 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 1 of 1

Explanation / Answer

Req 1 EXPECTED CASH COLLECTIONS APRIL MAY JUNE QUARTER Beginning Accounts receivable 168,000 18400 186,400 April Month Sales 62400 124800 16640 203,840 May Month Sales 133,800 267,600 401,400 June Month sales 81000 81,000 Total Cash Collections 230,400 277,000 365,240 872,640 Req 2: CASH BUDGET APRIL MAY JUNE YEAR Beginning Balance 26,500 24,000 28,600 26,500 Add: Receipt Cash Collections-as computed above 230,400 277,000 365,240 872,640 Total Cash available 256,900 301,000 393,840 899,140 Payments: Merchandise Purchase 142,500 152,000 172,500 467,000 payroll 24,400 24,400 19,600 68,400 Lease payment 23,600 23600 23600 70,800 Advertising 72,400 72400 49260 194,060 Equipment purchase 0 0 78500 78,500 Total Payments made 262,900 272,400 343,460 878,760 Net Balance -6,000 28,600 50,380 20,380 Add: Loan 30,000 30,000 Less: Repayment of principal 30,000 30,000 Less: Repayment of Interest 1000 1,000 Ending Balance of cash 24,000 28,600 19,380 19,380

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