Friendly Freddies is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddies. The bank requires that a minimum balance of $8,220 be kept in the chains checking account at the end of each month. When the balance goes below $8,220, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,220 at month-end.

Friendly Freddies attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans.

The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year.

Estimated beginning cash balance $ 8,830

Estimated cash sales:

October 13,500

November 29,040

December 43,950

Sales on account:

July (actual) 130,600

August (actual) 104,700

September (actual) 127,600

October (estimated) 134,000

November (estimated) 143,000

December (estimated) 188,700

Projected cash collection of sales on account is estimated to be 71 percent in the month following the sale, 19 percent in the second month following the sale, and 8 percent in the third month following the sale. The 2 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,200 cash on a note receivable in October.

All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available.

Inventory Purchases

September (actual) $ 121,000

October (estimated) 111,700

November (estimated) 127,500

December (estimated) 95,100

Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $38,400, $40,600, and $45,500, respectively.