The president of the retailer Prime 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. Becausethe company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cashbudget to help determine whether the loan should be made. The following data are available for the monthsApril through June, during which the loan will be used:a. On April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable onApril 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will becollected during May. The remainder will be uncollectible.b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in themonth following sale, and 8% in the second month following sale. The other 2% represents bad debtsthat are never collected. Budgeted sales and expenses for the three-month period follow:April May JuneSales (all on account) ........................... $300,000 $400,000 $250,000Merchandise purchases ........................ $210,000 $160,000 $130,000Payroll ................................................... $20,000 $20,000 $18,000Lease payments .................................... $22,000 $22,000 $22,000Advertising ............................................ $60,000 $60,000 $50,000Equipment purchases ........................... — — $65,000Depreciation .......................................... $15,000 $15,000 $15,000c. Merchandise purchases are paid in full during the month following purchase. Accounts payable formerchandise purchases during March, which will be paid during April, total $140,000.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 monthsin 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 repaidas planned? Explain.
The president of the retailer Prime 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. Because
the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a
budget
April through June, during which the loan will be used:
a. On April 1, the start of the loan period, the cash balance will be $24,000.
April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be
collected during May. The remainder will be uncollectible.
b. Past experience shows that 30% of a month’s 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% represents bad debts
that are never collected. Budgeted sales and expenses for the three-month period follow:
April May June
Sales (all on account) ........................... $300,000 $400,000 $250,000
Merchandise purchases ........................ $210,000 $160,000 $130,000
Payroll ................................................... $20,000 $20,000 $18,000
Lease payments .................................... $22,000 $22,000 $22,000
Advertising ............................................ $60,000 $60,000 $50,000
Equipment purchases ........................... — — $65,000
Depreciation .......................................... $15,000 $15,000 $15,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for
merchandise purchases during March, which will be paid during April, total $140,000.
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.
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Why step 2 about May & June beginning cash balances is 22000 & 26000 ?
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