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he 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 $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. |
| 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% represents 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 |
| c. |
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 $140,000. |
| 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 $1,200. |
| Required: |
| 1. |
Prepare a schedule of 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. (Cash deficiency, repayments and interest should be indicated by a minus sign.) |
Solution 1:
| Schedule of expected cash collection - Prime Products | ||||
| Particulars | April | May | June | Total |
| Accounts receivables | $120,000.00 | $16,000.00 | $136,000.00 | |
| Cash received for April Sale | $90,000.00 | $180,000.00 | $24,000.00 | $294,000.00 |
| Cash received for May Sale | $120,000.00 | $240,000.00 | $360,000.00 | |
| Cash received for June Sale | $75,000.00 | $75,000.00 | ||
| Budgeted Cash Collection | $210,000.00 | $316,000.00 | $339,000.00 | $865,000.00 |
Solution 2:
| Cash Budget - Prime Products | ||||
| Particulars | April | May | June | Total |
| Beginning Cash balance | $24,000.00 | $22,000.00 | $26,000.00 | $24,000.00 |
| Total reciepts | $210,000.00 | $316,000.00 | $339,000.00 | $865,000.00 |
| Total cash available (A) | $234,000.00 | $338,000.00 | $365,000.00 | $889,000.00 |
| Cash Disbursements: | ||||
| Purchase of merchandise | $140,000.00 | $210,000.00 | $160,000.00 | $510,000.00 |
| Payroll | $20,000.00 | $20,000.00 | $18,000.00 | $58,000.00 |
| Lease payment | $22,000.00 | $22,000.00 | $22,000.00 | $66,000.00 |
| Advertisting | $60,000.00 | $60,000.00 | $50,000.00 | $170,000.00 |
| Equipment purchases | $0.00 | $0.00 | $65,000.00 | $65,000.00 |
| Total cash disbursements (B) | $242,000.00 | $312,000.00 | $315,000.00 | $869,000.00 |
| Excess of cash available over disbursement (A-B) | -$8,000.00 | $26,000.00 | $50,000.00 | $20,000.00 |
| Financing: | ||||
| Borrowings | $30,000.00 | $0.00 | $0.00 | $30,000.00 |
| Loan principal repaid | $0.00 | $0.00 | $30,000.00 | $30,000.00 |
| Loan interest paid | $0.00 | $0.00 | $1,200.00 | $1,200.00 |
| Total financing | $30,000.00 | $0.00 | -$31,200.00 | -$1,200.00 |
| Ending cash balance | $22,000.00 | $26,000.00 | $18,800.00 | $18,800.00 |
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