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:

                                                                        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.