PROBLEM 7–21B Schedule of Expected Cash Collections; Cash Budget [LO2, LO8]
CHECK FIGURE
(1) July: $264,400
(2) July 31 cash balance: $3,400
Faces Au Natural Corp., a distributor of natural cosmetics, is ready to begin its third quarter, in which peak sales occur. The company has requested a $52,000, 90-day loan from its bank to help meet cash requirements during the quarter. Because the company has experienced difficulty in paying off its loans in the past, the bank’s loan officer has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:
a. On July 1, the beginning of the third quarter, the company will have a cash balance of $42,000.
b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):
|
May (actual)
|
$330,000
|
|
June (actual)
|
$290,000
|
|
July (budgeted)
|
$330,000
|
|
August (budgeted)
|
$490,000
|
|
September (budgeted)
|
$330,000
|
Past experience shows that 20% of a month’s sales are collected in the month of sale, 65% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible.
c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:
|
|
July
|
August
|
September
|
|
Merchandise purchases
|
$161,000
|
$151,000
|
$161,000
|
|
Salaries and wages
|
$68,000
|
$68,000
|
$58,000
|
|
Advertising
|
$70,000
|
$80,000
|
$90,000
|
|
Rent payments
|
$28,000
|
$28,000
|
$28,000
|
|
Depreciation
|
$35,000
|
$35,000
|
$35,000
|
Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $166,000.
d. Equipment costing $23,000 will be purchased for cash during July.
e. In preparing the cash budget, assume that the $52,000 loan will be made in July and repaid in September. Interest on the loan will total $1,900.
Required:
1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total.
2. Prepare a cash budget, by month and in total, for the third quarter.
3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain.