Jodi Horton, president of the retailer Crestline Products, has just approached t
ID: 403411 • Letter: J
Question
Jodi Horton, president of the retailer Crestline Products, has just approached the company%u2019s bank
with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in
acquiring inventories in support of peak April sales. 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%u2013June, during
which the loan will be used:
a. On April 1, the start of the loan period, the cash balance will be $26,000. Accounts receivable
on April 1 will total $151,500, of which $141,000 will be collected during April and $7,200
will be collected during May. The remainder will be uncollectible.
b. Past experience shows that 20% of a month%u2019s sales are collected in the month of sale, 75%
in the month following sale, and 4% in the second month following sale. The other 1% represents
bad debts that are never collected. Budgeted sales and expenses for the three-month
period follow:
April May June
Sales (all on account) . . . . . . . . . $200,000 $300,000 $250,000
Merchandise purchases . . . . . . . $120,000 $180,000 $150,000
Payroll. . . . . . . . . . . . . . . . . . . . . $9,000 $9,000 $8,000
Lease payments . . . . . . . . . . . . . $15,000 $15,000 $15,000
Advertising . . . . . . . . . . . . . . . . . $70,000 $80,000 $60,000
Equipment purchases . . . . . . . . . $8,000 %u2014 %u2014
Depreciation . . . . . . . . . . . . . . . . $10,000 $10,000 $10,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts payable
for merchandise purchases on March 31, which will be paid during April, total $108,000.
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:
1. Prepare a schedule of 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.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be
repaid as planned? Explain.
Explanation / Answer
April may june quarter receivable 141 000 7200 148 000 ============================================================================================================================================================================================ April sales 20% x200 000 40 00 40 000 ============================================================================================================================================================================================ 75% x200 000 150 000 150 000 ============================================================================================================================================================================================ 40% x200 000 8000 8000 ============================================================================================================================================================================================ 20% x300 000 60 000 ============================================================================================================================================================================================ 75% x300 000 225 000 225 000 ============================================================================================================================================================================================ 20% x250 000 50 000 50 000 ============================================================================================================================================================================================ Total cash collection 181 000 217 200 283 000 681 200
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