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 in late 2019 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 receipts and disbursements. He was also 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 Since the treasurer is unsure as to the particular quarters in which the bank financing will be needed, he has assembled the following information to assist in preparing a detailed cash budget: a. Budgeted sales and merchandise purchases for the year 2020, as well as actual sales and purchases for the last quarter of 2019, are as follows: Merchandise Purchases Sales 2019: Fourth-quarter actual S 280,000 S176,400 2020: First-quarter estimated Second-quarter estimated Third-quarter estimated Fourth-quarter estimated 420,000 560,000 700,000 280,000 260,400 347,200 427,000 176,400 b. The company normally collects 65% of a quarter's sales before the quarter ends and another 33% in the following quarter. The remainder are uncollectible. This pattern of collections is now being experienced in C. 80% of a quarter's merchandise purchases are paid for within the quarter. The remainder are paid in the d. Operating expenses for the year 2020 are budgeted quarterly at $70,000 plus 15% of sales. Of the fixed e. The company will pay $14,000 in dividends each quarter the 2019 fourth-quarter actual data. following quarter. amount, $28,000 each quarter is depreciation. f. Equipment purchases of S105,000 will be made in the second quarter, and purchases of $67,200 will be g. The cash account contained $14,000 at the end of 2019. The treasurer feels that this represents a h. Any borrowing will take place at the beginning of a quarter, and any repayments will be made at the end made in the third quarter. These purchases will be for cash. minimum balance that must be maintained of a quarter at an annual interest rate of 10%. Interest is paid only when the principal is repaid. All borrowings and all repayments of the principal must be in round S1,000 amounts. Interest payments can be in any amount. (Compute interest on whole months, e.g., 1/12, 2/12.) i. At present, the company has no loans outstanding.

Explanation / Answer

(a) A Schedule of expected cash collections WESTEX PRODUCTS Schedule of Expected Cash Collections First Second Third Fourth Total 2015 Fourth Quarter Sales 92400 92400 280000*0.33 2016 First Quarter Sales 273000 138600 411600 420000*0.65 420000*0.33 2016 Second Quarter Sales 364000 184800 548800 560000*0.65 560000*0.33 2016 Third Quarter Sales 455000 231000 686000 700000*0.65 700000*0.33 2016 Fourth Quarter Sales 182000 182000 280000*0.65 365400 502600 639800 413000 1920800 (b) A schedule of Budgeted cash Distributions from merchandise purchases WESTEX PRODUCTS Schedule of Expected Cash Disbursements for merchandise Purchases First Second Third Fourth Total 2015 Fourth Quarter Purchases 35280 35280 176400*0.20 2016 First Quarter Purchases 208320 52080 260400 260400*0.80 260400*0.20 2016 Second Quarter Purchases 277760 69440 347200 347200*0.80 347200*0.20 2016 Third Quarter Purchases 341600 85400 427000 427000*0.80 427000*0.20 2016 Fourth Quarter Purchases 141120 141120 176400*0.80 243600 329840 411040 226520 1211000 2 ) compute the expected cash payments for operating expenses , by quarter and in total for the year 2020 First Second Third Fourth Total Cash Payments Operating Expenses (Cash ($70000-28000) 42000 42000 42000 42000 168000 15% of Sales 63000 84000 105000 42000 294000 105000 126000 147000 84000 462000 3)   WESTEX PRODUCTS cash Budget for year 2020 First Second Third Fourth Total Opening cash Balance 14000 16800 14560 15120 14000 Add: Collections from Customers 365400 502600 639800 413000 1920800 Total cash Available 379400 519400 654360 428120 1934800 Deduct: Disbursemtns Payments for merchandise Payments 243600 329840 411040 226520 1211000 payments for Operating Expenses 105000 126000 147000 84000 462000 Payment of Dividends 14000 14000 14000 14000 56000 Equipment puchases 105000 67200 172200 Total Distributions 362600 574840 639240 324520 1901200 Excess /(Deficiency) of receipts over Distributions 16800 -55440 15120 103600 33600 Financing Borrowing 70000 70000 Interest (70000*10%*2/4) -3500 -3500 repayment -70000 -70000 Total 70000 -73500 -3500 Ending cash balance 16800 14560 15120 30100 30100 Second Quarter Borrowing =55440+14000 =69440 , in whole thousand , Loan amount is 70,000

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