The president of the retailer Prime Products has just approached the company’s b

Question

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 cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:

a. April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on 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:

Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total and prepare a cash budget, by month and in total, for the three-month period.

(I know this is a long question but can someone please help me with this and explain if you can in a step by step manner what the answer is and how I go about getting the answer, each step and everything, thank you very much.)

Explanation / Answer

Cash budget: Cash budget is a simple concept that includes the cash inflows and the cash out flows during the period. Cash budget can be prepared as follows; In the cash budget we have to add all the cash inflows to the cash in hand at the begining of the period, and then we have to deduct all the cash out flows. While preparing the cash budget we have to concentrate on the additional information. See here for sales we have to record the 30% of sales in the current month and the 60% in the following month, 8% in the second following month. As you asked for the solution in steps, the steps for the preparation of cash budget are as follows; Step 1: here we have to add the accounts receivables and sales to the cash in the begining of the period. we will get the available cash by adding the all cash inflows. (we have to add all the cash inflows for the first month) Step 2: here we have to record all the cash disbursements according to the given information (for the first month only). here we will get total cash disbursements Step 3: here we have to deduct the total cash disbursements from the available cash to get cash surplus/deficit. Step 4: here we have to record the first month's cash surplus/deficit amount as the next month begining cash balance. Step 5: we have to rotate the same activity in the second and the third months. Step 6: after getting the surplus cash balance in the final month, we have to deduct the other financing costs to get the cash at the end of the period. Let us follow the above steps to prepare a cash budget for the three months period. Particulars April May June Cash receipts: Cash in the beginning 24,000 7,000 -4,000 Accounts receivable 120,000 16,000 0 Sales 90,000 300,000 339,000 Loan cash 30,000 0 Available cash 264,000 323,000 335,000 Less: cash disbursements Merchandise purchases 140,000 210,000 160,000 Payroll 20,000 20,000 18,000 Lease payments 22,000 22,000 22,000 Advertising 60,000 60,000 50,000 Equipment purchases 0 0 65,000 Depreciation 15,000 15,000 15,000 Total cash disbursements 257,000 327,000 330,000 Cash surplus 7,000 -4,000 5,000 Less: financing Loan payment with interest 0 0 31,200 (30,000 + 1,200) Cash at the end of the period -26,200 Particulars April May June Cash receipts: Cash in the beginning 24,000 7,000 -4,000 Accounts receivable 120,000 16,000 0 Sales 90,000 300,000 339,000 Loan cash 30,000 0 Available cash 264,000 323,000 335,000 Less: cash disbursements Merchandise purchases 140,000 210,000 160,000 Payroll 20,000 20,000 18,000 Lease payments 22,000 22,000 22,000 Advertising 60,000 60,000 50,000 Equipment purchases 0 0 65,000 Depreciation 15,000 15,000 15,000 Total cash disbursements 257,000 327,000 330,000 Cash surplus 7,000 -4,000 5,000 Less: financing Loan payment with interest 0 0 31,200 (30,000 + 1,200) Cash at the end of the period -26,200 Particulars April May June Cash receipts: Cash in the beginning 24,000 7,000 -4,000 Accounts receivable 120,000 16,000 0 Sales 90,000 300,000 339,000 Loan cash 30,000 0 Available cash 264,000 323,000 335,000 Less: cash disbursements Merchandise purchases 140,000 210,000 160,000 Payroll 20,000 20,000 18,000 Lease payments 22,000 22,000 22,000 Advertising 60,000 60,000 50,000 Equipment purchases 0 0 65,000 Depreciation 15,000 15,000 15,000 Total cash disbursements 257,000 327,000 330,000 Cash surplus 7,000 -4,000 5,000 Less: financing Loan payment with interest 0 0 31,200 (30,000 + 1,200) Cash at the end of the period -26,200 I hope it will help you. Particulars April May June Cash receipts: Cash in the beginning 24,000 7,000 -4,000 Accounts receivable 120,000 16,000 0 Sales 90,000 300,000 339,000 Loan cash 30,000 0 Available cash 264,000 323,000 335,000 Less: cash disbursements Merchandise purchases 140,000 210,000 160,000 Payroll 20,000 20,000 18,000 Lease payments 22,000 22,000 22,000 Advertising 60,000 60,000 50,000 Equipment purchases 0 0 65,000 Depreciation 15,000 15,000 15,000 Total cash disbursements 257,000 327,000 330,000 Cash surplus 7,000 -4,000 5,000 Less: financing Loan payment with interest 0 0 31,200 (30,000 + 1,200) Cash at the end of the period -26,200

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