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