Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its
ID: 2344639 • Letter: H
Question
Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $70,700, 90-day loan from its bank to help meet cash requirements during the quarter. Because Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank 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 $33,000.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):
May (actual) $240,000
June (actual) $250,000
July (budgeted) $580,000
August (budgeted) $620,000
September (budgeted) $360,000
Past experience shows that 26% of a month
Explanation / Answer
Cash Inflow
44,000 Beginning Balance
357,500 July (3% x 250,000) + (70% x 300,000) + (25% x 400,000) + 40,000
439,000 August (3% x 300,000) + (70% x 400,000) + (25% x 600,000)
512,000 September (3% x 400,000) + (70% x 600,000) + (25% x 320,000)
= 1,352,500 Total cash inflow
Cash Outflow
374,000 July 180,000 + 45,000 + 130,000 + 9,000 + 10,000
444,000 August 240,000 + 50,000 + 145,000 + 9,000
483,120 September 350,000 + 40,000 + 80,000 + 9,000 + 4,120
= 1,301,120 Total cash outflow
1,352,500 - 1,301,120 = 51,380 Cash balance at the end of September
Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data has been assembled:
a. On July 1, the beginning of the third quarter, the company will have a cash balance of $44,500.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):
May (actual)...................... $250,000
June (actual)................. $300,000
July (actual)................... $400,000
August (actual)............... $600,000
September (actual)............$320,000
Past experience shows that 25% of a month's sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectable.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:
Merchandise purchases..... (July)$240,000 (August)$350,000 (September)$175,000
Salaries and wages..... (July)$45,000 (August)$50,000 (September)$40,000
Advertising..... (July)$130,000 (August)$145,000 (September)$80,000
Rent payments..... (July)$9,000 (August)$9,000 (September)$9,000
Depreciation..... (July)$10,000 (August)$10,000 (September)$10,000
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 $180,000
d. Equipment costing $10,000 will be purchased for cash during July.
e. In preparing the cash budget assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200.
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