Question:
Yamba Home Products is just beginning its fourth quarter, in which peak sales occur. The company has requested a $12,000, 90-day loan from its bank to help meet cash requirements during the quarter. The loan officer has asked for a cash budget for the quarter to help determine whether the loan should be made.
The following data are available for the quarter:
1. On April 1, the start of the quarter, the company had a cash balance of $6,000. Accounts receivable on April 1 totalled $31,500, of which $29,500 will be collected during April and $1,600 will be collected during May. The remainder will be uncollectable.
2. Past experience shows that 25 percent of a month's sales are collected in the month of sale, 70 percent in the month following sale, and 4 percent in the second month following sale. Budgeted sales and expenses for the fourth quarter follow:
|
|
April
|
May
|
June
|
|
Sales
|
$ 50,000
|
$60,000
|
$45,000
|
|
Merchandise purchase
|
36,000
|
27,000
|
24,000
|
|
Payroll
|
6,500
|
6,750
|
6,000
|
|
Rent payment
|
4,500
|
4,500
|
4,500
|
|
Other Cash payments
|
8,500
|
9,100
|
7,500
|
|
Depreciation
|
2,500
|
2,500
|
2,500
|
3. 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, totalled $30,000.
4. In preparing a cash budget, assume that the loan is made in April and repaid in June. Interest on the loan will total $450.
Required:
a. Prepare a schedule of budgeted cash collections for April, May and June and for the quarter in total.
b. Prepare a cash budget, by month and in total, for the quarter.
c. If the company needs a minimum cash balance of $5,000 to start each month, can the loan be repaid as planned? Explain.