Jake Marley, owner of Marley Wholesale, is negotiating with the bank for a $200,
ID: 2377130 • Letter: J
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
=======================================================================
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
=======================================================================
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.