Natural Care Corp., a distributor of natural cosmetics, is ready to begin its third quarter, in which

Question:

Natural Care Corp., a distributor of natural cosmetics, is ready to begin its third quarter, in which peak sales occur. The company has requested a $60,000, 90-day loan from its bank to help meet cash requirements during the quarter. Because Natural Care has experienced difficulty in paying off its loans in the past, the bank€™s loan officer has asked the company to prepare a for the quarter. In response to this request, the following data have been assembled:
a. On July 1, the beginning of the third quarter, the company will have a cash balance of $43,000.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):
May (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $360,000
June (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
July (budgeted) . . . . . . . . . . . . . . . . . . . . . . . $350,000
August (budgeted) . . . . . . . . . . . . . . . . . . . . $420,000
September (budgeted) . . . . . . . . . . . . . . . . . $360,000
Past experience shows that 25% of a month€™s sales are collected in the month of sale, 70% in the month following sale, and 2% in the second month following sale. The remainder is uncollectible.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $160,000.
d. Equipment costing $25,000 will be purchased for cash during July.
e. In preparing the cash budget, assume that the $60,000 loan will be made in July and repaid in September. Interest on the loan will total $2,000.

Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total.
2. Prepare a cash budget, by month and in total, for the third quarter.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned?Explain

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