PROBLEM 821 Schedule of Expected Cash Collections; Cash Budget [LO82, LO88]

The president of the retailer Prime Products has just approached the companys 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 1, 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 months 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 f ollow:

April May June

Sales (all on account) . . . . . . . . . . . . . $300,000 $400,000 $250,000

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.

382 Chapter 8

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.