Problem 8-23 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 $51,000, 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:

1. On April 1, the start of the loan period, the cash balance will be $24,400. Accounts receivable on April 1 will total $151,200, of which $129,600 will be collected during April and $17,280 will be collected during May. The remainder will be uncollectible.

2. 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% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

	April		May		June
Sales (all on account)	$	285,000	$	548,000	$	251,000
Merchandise purchases	$	194,000	$	179,000	$	171,000
Payroll	$	35,400	$	35,400	$	19,900
Lease payments	$	35,800	$	35,800	$	35,800
Advertising	$	64,400	$	64,400	$	40,400
Equipment purchases					$	68,500
Depreciation	$	19,400	$	19,400	$	19,400

3. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $141,500.

4. In preparing the cash budget, assume that the $51,000 loan will be made in April and repaid in June. Interest on the loan will total $860.

Required:

1. Calculate the expected cash collections for April, May, and June, and for the three months in total.

Schedule of Expected Cash Collections
	April	May	June	Quarter
Total cash collections	not attempted	not attempted	not attempted	not attempted

2. Prepare a cash budget, by month and in total, for the three-month period.

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	$24,400selected answer correct	$13,400selected answer correct	?	?
Add receipts:
Collections from customers	215,100selected answer correct	352,680selected answer correct	426,900selected answer correct	994,680selected answer correct
Total cash available	239,500	366,080	464,160	1,069,740
Less cash disbursements:
Merchandise purchases	141,500selected answer correct	194,000selected answer correct	179,000selected answer correct	514,500selected answer correct
Payroll	35,400selected answer correct	35,400selected answer correct	19,900selected answer correct	90,700selected answer correct
Lease payments	35,800selected answer correct	35,800selected answer correct	35,800selected answer correct	107,400selected answer correct
Advertising	64,400selected answer correct	64,400selected answer correct	40,400selected answer correct	169,200selected answer correct
Equipment purchases	not attempted	not attempted	68,500selected answer correct	68,500selected answer correct
Total cash disbursements	277,100	329,600	343,600	950,300
Excess (deficiency) of cash available over disbursements	(37,600)	36,480	120,560	119,440
Financing:
Borrowings	51,000selected answer correct	not attempted	not attempted	51,000selected answer correct
Repayments	not attempted	not attempted	(51,000)selected answer correct	(51,000)selected answer correct
Interest	not attempted	not attempted	(860)selected answer correct	(860)selected answer correct
Total financing	51,000		(51,860)	(860)
Ending cash balance	$13,400	$36,480	$68,700	$118,580