Westex Products is a wholesale distributor of industrial cleaning products. When

Question

Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.

Budgeted sales and merchandise purchases for next year, as well as actual sales and purchases for the last quarter of the current year, are:

All sales are on account. The company normally collects 65% of a quarter’s sales before the quarter ends and another 33% in the following quarter. The remainder is uncollectible. This pattern of collections is now being experienced in the current year’s fourth-quarter actual data.

Eighty percent of a quarter’s merchandise purchases are paid for within the quarter. The remainder is paid for in the following quarter.

Selling and administrative expenses for next year are budgeted at $50,000 per quarter plus 15% of sales. Of the fixed amount, $20,000 each quarter is depreciation.

Land purchases of $75,000 will be made in the second quarter, and purchases of $48,000 will be made in the third quarter. These purchases will be for cash.

The Cash account contained $10,000 at the end of the current year. The treasurer feels that this represents a minimum balance that must be maintained.

The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each quarter, up to a total loan balance of $100,000. The interest rate on these loans is 2.5% per quarter and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the year.

Westex Products is a wholesale distributor of industrial cleaning products. When the treasurer of Westex Products approached the company’s bank late in the current year seeking short-term financing, he was told that money was very tight and that any borrowing over the next year would have to be supported by a detailed statement of cash collections and disbursements. The treasurer also was told that it would be very helpful to the bank if borrowers would indicate the quarters in which they would be needing funds, as well as the amounts that would be needed, and the quarters in which repayments could be made.

Explanation / Answer

1 a) Schedule for expected Cash Collection First Second Third Fourth Total Current year - 4th Qtr Sale            66,000              66,000 Next Year = 1st Qtr Sale        1,95,000            99,000           2,94,000 Next Year = 2nd Qtr Sale        2,60,000        1,32,000           3,92,000 Next Year = 3rd Qtr Sale        3,25,000        1,65,000           4,90,000 Next Year = 4th Qtr Sale        1,30,000           1,30,000 Total Cash Collection        2,61,000        3,59,000        4,57,000        2,95,000        13,72,000 1 (b) Schedule for expected Cash Disbursement First Second Third Fourth Total Current year - 4th Qtr Purchase            25,200              25,200 Next Year = 1st Qtr purchase        1,48,800            37,200           1,86,000 Next Year = 2nd Qtr puchase        1,96,800            49,200           2,46,000 Next Year = 3rd Qtr Sale Purchase        2,44,000            61,000           3,05,000 Next Year = 4th Qtr Sale Purchase        1,00,800           1,00,800 Total Cash Disbursement        1,74,000        2,34,000        2,93,200        1,61,800           8,63,000 1 (c ) Cash Budget First Second Third Fourth Total Opening Cash            10,000            10,000            10,550                  125              10,000 Add:- Collection        2,61,000        3,59,000        4,57,000        2,95,000        13,72,000 Total        2,71,000        3,69,000        4,67,550        2,95,125        13,82,000 Less:- Disbursement Mechandise        1,74,000        2,34,000        2,93,200        1,61,800           8,63,000 Selling and ADM Exp            95,000        1,10,000        1,25,000            80,000           4,10,000 Dividend            10,000            10,000            10,000            10,000              40,000 Land            75,000            48,000           1,23,000 Total Cash Disbursement        2,79,000        4,29,000        4,76,200        2,51,800        14,36,000 Excess/(deficiency) over cash disbursement             -8,000          -60,000             -8,650            43,325             -54,000 Financing                        -   Borrowing            18,000            71,000            11,000           1,00,000 repayment          -30,000             -30,000 Interest                     -                  -450             -2,225             -2,500               -5,175 Total Financing            18,000            70,550              8,775          -32,500              64,825 Ending Cash balance            10,000            10,550                  125            10,825              10,825 Minimum Required            10,000            10,000            10,000            10,000              10,000 Difference                     -                    550             -9,875                  825                    825 It is assumed that loan has been taken at the end of the quarter

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