Jake Marley, owner of Marley Wholesale, is negotiating with the bank for a $200,

Question

Jake Marley, owner of Marley Wholesale, is negotiating with the bank for a $200,000, 90 day, 12 percent loan effective July 1 of the current year. If the bank grants the loan, the proceeds will be $194,000, which Marley intends to use on July 1 as follows: pay accounts payable, $150,000; purchase equipment, $16,000; add to bank balance, $28,000.... The current working capital position of Marley Wholesale, according to financial statements as June 30, is as follows:..... Cash in bank = $20,000 ..... Receivables (net of allowance for doubtful accounts) = 160,000.... Merchandise inventory = 90,000.... Total current assets = 270,000.... Accounts payable = (including accrued operating expenses) = 150,000..... Working capital = 120,000..... The bank loan officer asks Marley to prepare a forecast of his cash receipts and cash payments for the next 3 months to demonstrate that the loan can be repaid at the end of September...... Marley has made the following estimates, which are to be used in preparing a 3 month cash budget: Sales (all on account) for July, $300,000; August, $360,000; September, $270,000; and October, $200,000; Past experience indicates that 80 percent of the receivables generated in any month will be collected in the month following the sale, 19 percent will be collected in the 2nd month following the sales, and 1 percent will prove uncollectable. Marley expects to collect $120,000 on the June 30 receivables in July and the remaining $40,000 in August...... Cost of goods sold consistently has averaged about 65 percent of sales. Operating expenses are budgeted at $36,000 per month plus 8 percent of sales. With the exception of $4,400 per month depreciation expense, all operating expenses and purchases are on account and are paid in the month following the incurrence. ..... Merchandise inventory at the end of the month should be sufficient to cover the following month

Explanation / Answer

MARLEY WHOLESALE Cash Budget For Third Quarter of Current Year Sched July August September Cash Balance, beginning 20,000 168,000 53,400 Receipts Bank Loan 194,000 Collection of AR 1 120,000 280,000 345,000 Total Cash Receipts 314,000 280,000 345,000 Cash Available 334,000 448,000 398,400 Disbursements Purchase of Equipments 16,000 Payment of AP & Other Exp 4 150,000 394,600 235,900 Total Cash Disbursement 166,000 394,600 235,900 Cash Balance, Ending 168,000 53,400 162,500 Schedule 1-Collection of AR Outstanding AR at June 30 120,000 40,000 July Sales 80% x $300,000 240,000 19% x $300,000 57,000 August Sales 80% x $360,000 288,000 Budgeted Collection 120,000 280,000 345,000 Schedule 2-Purchases Sales 300,000 360,000 270,000 Cost of Goods Sold 195,000 234,000 175,500 Required Ending Invty 234,000 175,500 130,000 Total Merchandise Required 429,000 409,500 305,500 Beginning Merchandise Invty 90,000 234,000 175,500 Budgeted Purchase 339,000 175,500 130,000 Schedule 3-Cash Payments for Operating Expenses Fixed Expenses 36,000 36,000 36,000 Variable Expenses 24,000 28,800 21,600 Total 60,000 64,800 57,600 Depreciation Expense 4,400 4,400 4,400 Operating Expenses Paid 55,600 60,400 53,200 Schedule 4-Payment of Accounts Payable and Other Expenses Accounts Payable, June 30 150,000 Purchases (Schedule 2) 339,000 175,500 Operating Expenses 55,600 60,400 150,000 394,600 235,900 Based on the cash forecast, Marley will not be able to repay the bank loan in full when it comes due on September 30. Marley may arrange longer term with the bank; reduce his loan to $150,000 (depending on the minimum cash requirement); or borrow atleast $50,000 from other bank on September 30 in able to settle the $200,000 obligation.

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