Accounting for business decision making assignment 12

Accounting for Business Decision Making Assignment
12
Task 03: Cash Budget
Natural Care Corp., a distributor of natural cosmetics, is ready to begin its third
quarter, in which peak sales occur. The company has requested a $60,000, 90-day
loan from its bank to help meet cash requirements during the quarter. Because
Natural Care 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 $43,000.
b. Actual sales for the last two months and budgeted sales for the third quarter follow
(all sales are on account):
May (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $360,000
June (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $280,000
July (budgeted) . . . . . . . . . . . . . . . . . . . . . . . $350,000
August (budgeted) . . . . . . . . . . . . . . . . . . . . $420,000
September (budgeted) . . . . . . . . . . . . . . . . . $360,000
Past experience shows that 25% of a month’s sales are collected in the month of
sale, 70% in the month following sale, and 2% 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 . . . . . . . . . . $170,000 $155,000 $165,000
Salaries and wages . . . . . . . . . . . . . . . $70,000 $70,000 $65,000
Advertising . . . . . . . . . . . . . . . . . . . . . . $80,000 $90,000 $100,000
Rent payments . . . . . . . . . . . . . . . . . . . $30,000 $30,000 $30,000
Depreciation . . . . . . . . . . . . . . . . . . . . . $40,000 $40,000 $40,000
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 $160,000.
d. Equipment costing $25,000 will be purchased for cash during July.
e. In preparing the cash budget, assume that the $60,000 loan will be made in July
and repaid in September. Interest on the loan will total $2,000.
Required:

Accounting for Business Decision Making Assignment
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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.
Answer:
$
$

Accounting for Business Decision Making Assignment
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$420,000 X 70%
$
294,000.00
$
294,000.00
September sales
$360,000 X 25%
$
90,000.00
$
90,000.00
Total cash
collections
$
290,700.00
$
355,600.00
$
391,000.00
$
1,037,300.00
2. Prepare the cash budget, by month and in total and for the third quarter:
July August September Quarter
Beginning cash
balance
$
43,000
$
28,700
$
24,300
$
43,000
Add: cash collections
$
290,700
$
355,600
$
391,000
$
1,037,300
Total cash
available
$
333,700
$
384,300
$
415,300
$
1,080,300
Less disbursements:
Merchandise
purchases
$
160,000
$
170,000
$
155,000
$
485,000
Salaries and wages
$
70,000
$
70,000
$
65,000
$
205,000
Advertising
$
80,000
$
90,000
$
100,000
$
270,000
Rent payments
$
30,000
$
30,000
$
30,000
$
90,000
Equipment
purchases
$
25,000 - -
$
25,000
Total disbursements
$
365,000
$
360,000
$
350,000
$
1,075,000
Excess
(31,000)
$
24,300
$
65,300
$
5,300
Financing:

Accounting for Business Decision Making Assignment
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Borrowings
$
60,000 - -
$
60,000
Repayments
(60,000) (60,000)
Interest
(2,000) (2,000)
Total financing
$
60,000 (62,000) (2,000)
Ending cash
balance
$
28,700
$
24,300
$
3,300
$
3,300
3. Based on the data as table above, the loan can be repaid in full in case the