Question

The president of the retailer prime products has just approached the company's bank with a request for a $61,000, 90-day loan. the purpose of the loan is to assist the company in acquiring inventories. 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 through june, during which the loan will be used: on april 1, the start of the loan period, the cash balance will be $42,500. accounts receivable on april 1 will total $165,200, of which $141,600 will be collected during april and $18,880 will be collected during may. the remainder will be uncollectible. past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. the other 2% is bad debts that are never collected. budgeted sales and expenses for the three-month period follow: april may june sales (all on account) $ 304,000 $ 532,000 $ 275,000 merchandise purchases $ 232,000 $ 201,500 $ 138,000 payroll $ 27,600 $ 27,600 $ 22,000 lease payments $ 41,200 $ 41,200 $ 41,200 advertising $ 60,200 $ 60,200 $ 60,280 equipment purchases − − $ 82,000 depreciation $ 33,000 $ 33,000 $ 33,000 merchandise purchases are paid in full during the month following purchase. accounts payable for merchandise purchases during march, which will be paid in april, total $150,500. in preparing the cash budget, assume that the $61,000 loan will be made in april and repaid in june. interest on the loan will total $960. required: calculate the expected cash collections for april, may, and june, and for the three months in total. prepare a cash budget, by month and in total, for the three-month period.

Answer 1

The cash budget calculates the Prime Products' ability to repay the requested $61,000 loan by analyzing expected cash collections against expenses for April through June. the budget takes into account receivables sales predictions and the pattern of collections with the bank considering the company's past payment difficulties.

Step-by-step explanation:

The president of the retailer Prime Products is seeking a $61,000 90-day loan to assist in acquiring inventories. Creating a cash budget will help the company's bank determine the viability of granting the loan, considering the company's past difficulties with loan repayments. Expected cash collections and a cash budget are required for April, May, and June to decide on the loan request.

To calculate the expected cash collections, we must analyze the receivables and apply the percentage collection pattern to the sales figures provided. For April, the company expects to collect $141,600 from previous accounts receivable and 30% of April's sales. For May, it will collect $18,880 remaining from April's accounts receivable, 60% of April's sales, and 30% of May's sales. June will bring in the remaining 8% of April's sales, 60% of May's sales, and 30% of June's sales. Any remaining accounts receivable are anticipated to be collected in the following months or considered as bad debts. to prepare the cash budget, we begin with the starting cash balance, add the expected cash collections, and subtract the expenses for each month. The budget will account for loan disbursement in April and its repayment, including interest, in June. overall, the cash budget will offer insights into the company's ability to meet its financial obligations including the proposed new loan and will aid the bank in making an informed lending decision. Past financial difficulties of the company will be taken into consideration along with the projected cash flows.