Problem 8-21 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8]

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 $36,600. Accounts receivable on April 1 will total $185,150, of which $156,000 will be collected during April and $23,400 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 follow:

	April		May		June
Sales (all on account)	$	330,000	$	550,000	$	307,000
Merchandise purchases	$	253,000	$	207,000	$	143,000
Payroll	$	26,800	$	26,800	$	18,500
Lease payments	$	32,600	$	32,600	$	32,600
Advertising	$	71,400	$	71,400	$	85,420
Equipment purchases	$					80,000
Depreciation	$	29,800	$	29,800	$	29,800

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 $167,500.

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 $1,120.

Required:

1.	Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total.

Schedule of Expected Cash Collections
	April	May	June	Quarter
From accounts receivable
From April sales
From May sales
From June sales
Total cash collections

2.	Prepare a cash budget, by month and in total, for the three-month period. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Prime Products
Cash Budget
	April	May	June	Quarter
Beginning cash balance
Add receipts:
Collections from customers
Total cash available
Less cash disbursements:
Merchandise purchases
Payroll
Lease payments
Advertising
Equipment purchases
Total cash disbursements
Excess (deficiency) of cash available over disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Ending cash balance