CASH BUDGET

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 I, 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:

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                                                                        April                May                 June

 

Sales (all on account)                                      $300,000         $400,000         $400,000

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.

3.     If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain.