Problem 8-21 Schedule of Expected Cash Collections; Cash Budget [LO2, LO8]

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 $70,000, 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 banks loan officer has asked the company to prepare a cash budget 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 $44,000.

b.	Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):

May (actual)	$	430,000
June (actual)	$	390,000
July (budgeted)	$	440,000
August (budgeted)	$	520,000
September (budgeted)	$	517,000

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:

	July			August			September
Merchandise purchases	$	264,000		$	260,000		$	310,200
Salaries and wages	$	78,000		$	78,000		$	63,000
Advertising	$	88,000		$	98,000		$	99,000
Rent payments	$	28,000		$	28,000		$	28,000
Depreciation	$	43,000		$	43,000		$	43,000

	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 $234,000.
d.	Equipment costing $25,000 will be purchased for cash during July.
e.	In preparing the cash budget, assume that the $70,000 loan will be made in July and repaid in September. Interest on the loan will total $2,600.