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.

Answer 1

The cash budget is used to analyze cash inflows and outflows during the loan period to determine if the loan should be made. By calculating total cash inflows and subtracting cash outflows, the cash balance can be determined. This analysis helps assess the company's ability to afford the loan.

Step-by-step explanation:

The cash budget is used to determine whether the loan should be made by analyzing the company's cash inflows and outflows during the loan period.

The cash balance at the start of the loan period is $42,500. In April, $141,600 will be collected from accounts receivable, and in May $18,880 will be collected. The remaining amount is considered uncollectible.

Using the given data, the cash budget can be prepared by calculating the total cash inflows from sales and accounts receivable collections, and subtracting the cash outflows for expenses and purchases. The resulting cash balance will help determine if the company can afford the loan.