Problem 8-23 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8] The president of the retailer Prime Products has just approached the company’s bank with a request for a $51,000, 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 $24,400. Accounts receivable on April 1 will total $151,200, of which $129,600 will be collected during April and $17,280 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) $ 285,000 $ 548,000 $ 251,000 Merchandise purchases $ 194,000 $ 179,000 $ 171,000 Payroll $ 35,400 $ 35,400 $ 19,900 Lease payments $ 35,800 $ 35,800 $ 35,800 Advertising $ 64,400 $ 64,400 $ 40,400 Equipment purchases − − $ 68,500 Depreciation $ 19,400 $ 19,400 $ 19,400 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 $141,500. In preparing the cash budget, assume that the $51,000 loan will be made in April and repaid in June. Interest on the loan will total $860. Required: 1. Calculate the expected cash collections for April, May, and June, and for the three months in total. 2. Prepare a cash budget, by month and in total, for the three-month period.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Problem 8-23 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8]
The president of the retailer Prime Products has just approached the company’s bank with a request for a $51,000, 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:
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On April 1, the start of the loan period, the cash balance will be $24,400.
Accounts receivable on April 1 will total $151,200, of which $129,600 will be collected during April and $17,280 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) | $ | 285,000 | $ | 548,000 | $ | 251,000 |
| Merchandise purchases | $ | 194,000 | $ | 179,000 | $ | 171,000 |
| Payroll | $ | 35,400 | $ | 35,400 | $ | 19,900 |
| Lease payments | $ | 35,800 | $ | 35,800 | $ | 35,800 |
| Advertising | $ | 64,400 | $ | 64,400 | $ | 40,400 |
| Equipment purchases | − | − | $ | 68,500 | ||
| $ | 19,400 | $ | 19,400 | $ | 19,400 | |
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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 $141,500.
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In preparing the cash budget, assume that the $51,000 loan will be made in April and repaid in June. Interest on the loan will total $860.
Required:
1. Calculate the expected cash collections for April, May, and June, and for the three months in total.
2. Prepare a cash budget, by month and in total, for the three-month period.
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