QUESTION 2

Western Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store's operations follow:

• Sales are budgeted at $390,000 for November, $370,000 for December, and $380,000 for January.
• Collections are expected to be 90% in the month of sale, 5% in the month following the sale, and 5% uncollectible.
• The cost of goods sold is 60% of sales.
• The company purchases 70% of its merchandise in the month prior to the month of sale and 30% in the month of sale. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $21,800.
• Monthly depreciation is $18,000.
• Ignore taxes.

Statement of Financial Position October 31 Assets Cash 25.000 Accounts receivable (net of allowance for uncollectible accounts) 71.000 Inventory 163.800 Property, plant and equipment (net of $504.000 accumulated depreciation) 1.088 000 Total assets ... $1.347.800 Liabilities and Stockholders Equity Accounts payable ... $ 232.000 Common stock 700.000 Retained earnings 415.800 Total liabilities and stockholders equity $1.347.800Jodi Horton, president of the retailer Crestline Products, has just approached the company's bank with a request for a $30,000. 90-day loan. The purpose of the loan is to assist the company in acquiring inventories in support of peak April sales. 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-June, dur- ing which the loan will be used: a. On April 1, the start of the loan period, the cash balance will be $26,000. Accounts receivable on April I will total $151,500, of which $141,000 will be collected during April and $7,200 will be collected during May. The remainder will be uncollectible. b. Past experience shows that 20% of a month's sales are collected in the month of sale, 75% in the month following sale, and 4% in the second month following sale. The other 1% rep- resents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow: April May June Sales (all on account) . . . . . . . .. $200,000 $300.000 $250,000 Merchandise purchases . . . .. $120.000 $180.000 $150,000 Payroll . . . . . . . . $9.000 $9.000 $8,000 Lease payments . . . . . . $15,000 $15.000 $15,000 Advertising . . . . . . $70.000 $80.000 $60.000 Equipment purchases. $8.000 Depreciation . . . . . . $10,000 $10,000 $10,000 c. Merchandise purchases are paid in full during the month following purchase. Accounts pay- able for merchandise purchases on March 31, which will be paid during April, total $108,000. 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. 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.The president of Univax, Inc., has just approached the company's bank seeking short-term finance ing for the coming year, Year 2. Univax is a distributor of commercial vacuum cleaners. The bank has stated that the loan request must be accompanied by a detailed cash budget that shows the quarters in which financing will be needed, as well as the amounts that will be needed and the quarters in which repayments can be made. To provide this information for the bank, the president has directed that the following data be gathered from which a cash budget can be prepared: Budgeted sales and merchandise purchases for Year 2, as well as actual sales and purchases for the last quarter of Year 1. are as follows:A B C D 1 Merchandise 2 Sales Purchases 3 Year 1: 4 Fourth quarter actual $300,000 $180.000 5 Year 2: First quarter estimated $400,000 $260,000 Second quarter estimated $500,000 $310.00D Third quarter estimated $600.000 $370.000 Fourth quarter estimated $480.000 $240.000 10 14 . H Sheetl Sheet2 Sheet3 4 b. The company typically collects 33% of a quarter's sales before the quarter ends and another 65% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the actual data for the Year I fourth quarter. C. Some 20% of a quarter's merchandise purchases are paid for within the quarter. The remain- der is paid in the following quarter. d. Selling and administrative expenses for Year 2 are budgeted at $90,000 per quarter plus 12% of sales. Of the fixed amount, $20,000 each quarter is depreciation. C. The company will pay $10,000 in cash dividends each quarter. Land purchases will be made as follows during the year: $80,000 in the second quarter and $48,500 in the third quarter. B. The Cash account contained $20,000 at the end of Year 1. The company must maintain a mini- mum cash balance of at least $18,000. h. The company has an agreement with a local bank that allows the company to borrow in incre- ments of $10,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year. i. At present, the company has no loans outstanding. Required: 1. Prepare the following. by quarter and in total, for Year 2: a. A schedule of expected cash collections on sales. b. A schedule of expected cash disbursements for merchandise purchases. 2. Compute the expected cash disbursements for selling and administrative expenses, by quarter and in total, for Year 2. 3. Prepare a cash budget by quarter and in total for Year 2.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 $60,000, 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 bank's 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 $43,000. b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account): May (actual) . . $360,000 June (actual) . . $280,000 July (budgeted) . . . . . $350,000 August (budgeted) . . . $420,000 September (budgeted) $360,000 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 $170,000 $155,000 $165,000 Salaries and wages $70,000 $70,000 $65,000 Advertising . . . $80,000 $90,000 $100,000 Rent payments $30,000 $30,000 $30,000 Depreciation .. $40,000 $40,000 $40,000 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 $160,000. . Equipment costing $25,000 will be purchased for cash during July. C. In preparing the cash budget, assume that the $60,000 loan will be made in July and repaid in September. Interest on the loan will total $2,000. Required: 1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. 2. Prepare a cash budget, by month and in total, for the third quarter. 3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain