The Hubbard Corporation is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $100,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Since Hubbard Corporation has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company prepare a cash budget for the third quarter. The following data has been gathered by the staff. On July 1, 2021, the beginning of the third quarter, the company will have a cash balance of $75,000. Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account). Month Amount in Dollars ($) May (actual) 500,000 June (actual) 480,000 July (budgeted) 520,000 August (budgeted) 550,000 September (budgeted) 600,000 Past experience shows that 30% of a month's sales are collected in the month of sale, 60% in the month following the sale, and 5% in the second month following the sale. The remainder is uncollectible. Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below. July August September Purchases (Merchandise) $200,000 $210,000 $175,000 Salaries & Wages $110,000 $110,000 $100,000 Advertising $150,000 $150,000 $150,000 Rent Payments $40,000 $40,000 $40,000 Depreciation $55,000 $55,000 $55,000 Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $150,000. The company will purchase equipment for the month of August, which is expected to cost $30,000, and it will be paid during the month of August. In preparing the cash budget, assume that the $100,000 loan will be made in July and repaid in September. The interest rate charged on the loan is 10% annually. Prepare a schedule of expected cash receipts (collections) for July, August, and September and for the quarter in total. Prepare a cash budget, by month and in total, for third quarter (July through September). If the company needs a minimum cash balance of $75,000 to start each month, can the loan be repaid as planned? Please explain.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
The Hubbard Corporation is a distributor of hair care products and is ready to start the third quarter, in which its peak sales occur. The company has requested a $100,000, 90-day loan from its bank to help them meet their cash requirements for the third quarter. Since Hubbard Corporation has experienced difficulty in paying off their loans in previous years, the loan officer has requested the company prepare a cash budget for the third quarter.
The following data has been gathered by the staff.
- On July 1, 2021, the beginning of the third quarter, the company will have a cash balance of $75,000.
- Actual sales for the last 2 months and budgeted sales for the third quarter (all sales are on account).
Month | Amount in Dollars ($) |
---|---|
May (actual) | 500,000 |
June (actual) | 480,000 |
July (budgeted) | 520,000 |
August (budgeted) | 550,000 |
September (budgeted) | 600,000 |
Past experience shows that 30% of a month's sales are collected in the month of sale, 60% in the month following the sale, and 5% in the second month following the sale. The remainder is uncollectible.
- Budgeted merchandise purchases and budgeted expenses for the third quarter are provided below.
July | August | September | |
---|---|---|---|
Purchases (Merchandise) | $200,000 | $210,000 | $175,000 |
Salaries & Wages | $110,000 | $110,000 | $100,000 |
Advertising | $150,000 | $150,000 | $150,000 |
Rent Payments | $40,000 | $40,000 | $40,000 |
|
$55,000 | $55,000 | $55,000 |
Merchandise purchases are paid in full during the month following purchase. The accounts payable for merchandise purchases on June 30, which will be paid during the month of July, total $150,000.
- The company will purchase equipment for the month of August, which is expected to cost $30,000, and it will be paid during the month of August.
- In preparing the cash budget, assume that the $100,000 loan will be made in July and repaid in September. The interest rate charged on the loan is 10% annually.
- Prepare a schedule of expected cash receipts (collections) for July, August, and September and for the quarter in total.
- Prepare a cash budget, by month and in total, for third quarter (July through September).
- If the company needs a minimum cash balance of $75,000 to start each month, can the loan be repaid as planned? Please explain.
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