The president of the retailer Prime Products has just approached the company\'s

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. On April 1, the start of the loan period, the cash balance will be $33,600. Accounts receivable on April 1 will total $166,900, of which $129,000 will be collected during April and $32,500 will be collected during May. The remainder will be uncollectible D. 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% is bad debts that are never collected. Budgeted sales and expenses for the three- month period follow: April May $366,000 $534,000 340,000 $285,000 $203,000 171,500 $ 21,000 21,000 34,900 $35,000 35,000 35,000 $ 71,000 71,000 67,200 ine Sales (all on account) Merchandise purchases Payroli1 Lease payments Advertising Equipment purchases Depreciation 89,500 $22,000 22,000 22,000 c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $153,500 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 $800. Required: 1. Calculate the expected cash collections for April, May, and June, and for the three months in total 2. Prepare a cash budget, by month and in total, for the three-month period

Explanation / Answer

Required Budgets are as prepared below:

1. Sales Budget Prime Products Sales Budget For the quarter ended June 30,20XX Month Particulars April May June Total Total Sales $366,000 $534,000 $340,000 1,240,000 Prime Products Schedule of expected Cash collections For the quarter ended June 30,20XX Month Particulars April May June Total Beginning Accounts Receivable (a) 129,000 32,500 161,500 April Sales 109,800 219,600 29,280 358,680 May Sales 160,200 320,400 262,200 June Sales 102,000 451,680 Total collections 238,800 412,300 451,680 651,100 3. Raw material Budget Prime Products Raw Material Purchase Budget For the quarter ended June 30,20XX Month Particulars April May June Total Merchandise purchases $285,000 $203,000 $171,500 659,500 Prime Products Schedule of expected Cash payments For the quarter ended June 30,20XX Month Particulars April May June Total Beginning Accounts Payable (a) $153,500 $153,500 April Purchases (b) $285,000 $285,000 May Purchases (c ) $203,000 $203,000 June Purchases (d) $0 Total payments (a+b+c+d) $153,500 $285,000 $203,000 $641,500 Prime products Cash Budget For the quarter ended June 30,20XX Month Particulars April May June Total Beginning Cash balance 33,600 21,900 22,200 33,600 Add: Budgeted Cash receipts $238,800 $412,300 $451,680 $1,102,780 cash available for use $272,400 $434,200 $473,880 $1,136,380 Less: cash Disbursements    Merchandise purchase $153,500 $285,000 $203,000 641,500    Payroll 21,000 21000 34900 76,900    Lease payments 35,000 35,000 35,000 105,000    Advertising 71,000 71,000 67,200 209,200    Equipment purchase 0 0 89,500 89,500 Total disbusrement 280,500 412,000 429,600 1,122,100 Cash surplus/Deficit -8,100 22,200 44,280 14,280 Financing    Borrowing 30,000 30,000    Repayment -30,000 -30,000    Interest -800 -800 Net cash from Financing 30,000 0 30,800 -800 Budgeted ending cash balance 21,900 22,200 13,480 13,480

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