Question: Jodi Horton, president of the retailed Crestline Products, has just approached the company's bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories in support of peak April sales. Since 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 - June, during which time the loan will be used:
a) On April 1, the cash balance will be $26,000. Accounts receivable on April will total $162,000, of which $150,000 will be collected during April and $9,000 will be collected during May. The remainder will be uncollectible.
b) Past experience shows that 20% of a month's sales are collected in the month of sale, 75% in the month following sale, and 4% in the second month following sale. The other 1% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
|
April
|
May
|
June
|
|
Sales (all on account)
|
$200,000
|
$300,000
|
$250,000
|
|
Merchandise purchases
|
$120,000
|
$180,000
|
$150,000
|
|
Payroll
|
9,000
|
9,000
|
9,000
|
|
Lease payments
|
15,000
|
15,000
|
15,000
|
|
Advertising
|
70,000
|
80,000
|
60,000
|
|
Equipment purchases
|
8,000
|
0
|
0
|
|
Depreciation
|
10,000
|
10,000
|
10,000
|
c) 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 total $108,000.
d) In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.
Required: Prepare a cash budget, by month and in total, for the three month period. Use the attached worksheet to record your answers, showing all calculated work where necessary. If the company needs a minimum cash balance of $25,000 to start each month, can the loan be repaid as planned? Explain.