Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bank requires that a minimum balance of $8,200 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,200 at month-end. Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans. The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year. Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 cash on a note receivable in October. All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available. Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $38,000, $41,000, and $46,000, respectively. Required: Prepare Friendly Freddie’s cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. (CMA adapted)

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter 8, Problem 39P
Textbook Problem

Friendly Freddie’s is an independently owned major appliance and electronics discount chain with seven stores located in a Midwestern metropolitan area. Rapid expansion has created the need for careful planning of cash requirements to ensure that the chain is able to replenish stock adequately and meet payment schedules to creditors. Fred Ferguson, founder of the chain, has established a banking relationship that provides a $200,000 line of credit to Friendly Freddie’s. The bank requires that a minimum balance of $8,200 be kept in the chain’s checking account at the end of each month. When the balance goes below $8,200, the bank automatically extends the line of credit in multiples of $1,000 so that the checking account balance is at least $8,200 at month-end.

Friendly Freddie’s attempts to borrow as little as possible and repays the loans quickly in multiples of $1,000 plus 2 percent monthly interest on the entire loan balance. Interest payments and any principal payments are paid at the end of the month following the loan. The chain currently has no outstanding loans.

The following cash receipts and disbursements data apply to the fourth quarter of the current calendar year.

Chapter 8, Problem 39P, Friendly Freddies is an independently owned major appliance and electronics discount chain with , example  1

Projected cash collection of sales on account is estimated to be 70 percent in the month following the sale, 20 percent in the second month following the sale, and 6 percent in the third month following the sale. The 4 percent beyond the third month following the sale is determined to be uncollectible. In addition, the chain is scheduled to receive $13,000 cash on a note receivable in October.

All inventory purchases are made on account as the chain has excellent credit with all vendors because of a strong payment history. The following information regarding inventory purchases is available.

Chapter 8, Problem 39P, Friendly Freddies is an independently owned major appliance and electronics discount chain with , example  2

Cash disbursements for inventory are made in the month following purchase using an average cash discount of 3 percent for timely payment. Monthly cash disbursements for operating expenses during October, November, and December are estimated to be $38,000, $41,000, and $46,000, respectively.

Required:

Prepare Friendly Freddie’s cash budget for the months of October, November, and December showing all receipts, disbursements, and credit line activity, where applicable. (CMA adapted)

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Chapter 8 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 8 - While many small firms do not put together a...Ch. 8 - Discuss the shortcomings of the traditional master...Ch. 8 - Define static budget. Give an example that shows...Ch. 8 - What are the two meanings of a flexible budget?...Ch. 8 - What are the steps involved in building an...Ch. 8 - FlashKick Company manufactures and sells soccer...Ch. 8 - Refer to Cornerstone Exercise 8.1, through...Ch. 8 - Refer to Cornerstone Exercise 8.2 for the...Ch. 8 - The School of Accounting (SOA) at State University...Ch. 8 - Johnston Company cleans and applies powder coat...Ch. 8 - Play-Disc makes Frisbee-type plastic discs. Each...Ch. 8 - Refer to Cornerstone Exercise 8.6. Required: 1....Ch. 8 - Timothy Donaghy has developed a unique formula for...Ch. 8 - Green Earth Landscaping Company provides monthly...Ch. 8 - Coral Seas Jewelry Company makes and sells costume...Ch. 8 - Shalimar Company manufactures and sells industrial...Ch. 8 - Khloe Company imports gift items from overseas and...Ch. 8 - Nashler Company has the following budgeted...Ch. 8 - Refer to Cornerstone Exercise 8.13. In March,...Ch. 8 - Palmgren Company produces consumer products. The...Ch. 8 - Berring Company produces two products: the deluxe...Ch. 8 - Crescent Company produces stuffed toy animals; one...Ch. 8 - Audio-2-Go, Inc., manufactures MP3 players. Models...Ch. 8 - Tiger Drug Store carries a variety of health and...Ch. 8 - Rosita Flores owns Rositas Mexican Restaurant in...Ch. 8 - Refer to Exercise 8.20. Rosita thinks that it may...Ch. 8 - Janet Wooster owns a retail store that sells new...Ch. 8 - Historically, Ragman Company has had no...Ch. 8 - Del Spencer is the owner and founder of Del...Ch. 8 - Refer to Exercise 8.24. Del Spencers purchases...Ch. 8 - Ingles Corporation is a manufacturer of tables...Ch. 8 - In an attempt to improve budgeting, the controller...Ch. 8 - Refer to Exercise 8.27. At the end of the year,...Ch. 8 - Olympus, Inc., manufactures three models of...Ch. 8 - Refer to Exercise 8.29. Suppose Gene determines...Ch. 8 - Trumbull Co. plans to produce 100,000 toy cars...Ch. 8 - Which of the following describes the order in...Ch. 8 - A companys controller is adjusting next years...Ch. 8 - A companys sales for the coming months are as...Ch. 8 - The budget that adjusts unit sales for beginning...Ch. 8 - Ponderosa, Inc., produces wiring harness...Ch. 8 - Bernard Creighton is the controller for Creighton...Ch. 8 - Greiner Company makes and sells high-quality glare...Ch. 8 - Friendly Freddies is an independently owned major...Ch. 8 - The controller for Muir Companys Salem plant is...Ch. 8 - Refer to Problem 8.40 for data. Required: 1. Run a...Ch. 8 - Norton Company, a manufacturer of infant furniture...

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