Problem 8.39 (Algorithmic) Cash Budget

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 $8,250 be kept in the chains checking account at the end of each month. When the balance goes below $8,250, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,250 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	$	8,820
Estimated cash sales:
October		13,860
November		29,250
December		44,440
Sales on account:
July (actual)		130,900
August (actual)		103,700
September (actual)		128,100
October (estimated)		135,600
November (estimated)		142,900
December (estimated)		188,700

Projected cash collection of sales on account is estimated to be 72 percent in the month following the sale, 18 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 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)	$	120,400
October (estimated)		112,500
November (estimated)		128,400
December (estimated)		94,800

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 $37,900, $40,700, and $46,100, respectively.

Required:

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Prepare Friendly Freddies cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. (CMA adapted). Enter all cash disbursements as positive values. If a cash balance is negative, enter the amount as a negative value. If an amount is zero, enter "0".

Friendly Freddie's
Cash Budget
October through December
		October		November		December
Beginning cash balance		$		$		$
Receipts:
Cash sales
Collections of sales on account
Note receivable repayment
Total cash available		$		$		$
Disbursements:
Payment of inventory purchases		$		$		$
Operating expenses
Loan repayment
Interest
Total disbursements		$		$		$
Cash balance		$		$		$
Bank loan
Adjusted cash balance		$		$		$