Problem - During the last week of August, Apache Arts Company's owner approaches the bank for an $107,500 loan to be made on September 2 and repaid on November 30 with annual interest of 14%, for an interest cost of $3,763. The owner plans to increase the store's inventory by $60,000 during September and needs the loan to pay for inventory acquisitions. The bank's loan officer needs more information about Apache Arts' ability to repay the loan and asks the owner to forecast the store's November 30 cash position. On September 1, Apache Arts is expected to have a $4,000 cash balance, $121,600 of accounts receivable, and $100,000 of accounts payable. Its budgeted sales, merchandise purchases, and various cash disbursements for the next three months follow
Budgeted Figures* September October November
Sales $ 210,000 $ 455,000 $ 440,000
Merchandise purchases 220,000 210,000 194,000
Cash disbursements
Payroll 19,900 21,950 24,800
Rent 12,000 12,000 12,000
Other cash expenses 34,900 29,800 21,050
Repayment of bank loan 107,500
Interest on the bank loan 3,763
Operations began in August; August sales were $160,000 and purchases were $115,000.
The budgeted September merchandise purchases include the inventory increase. All sales are on account. The company predicts that 24% of credit sales is collected in the month of the sale, 44% in the month following the sale, 21% in the second month, 8% in the third, and the remainder is uncollectible. Applying these percents to the August credit sales, for example, shows that $70,400 of the $160,000 will be collected in September, $33,600 in October, and $12,800 in November. All merchandise is purchased on credit; 70% of the balance is paid in the month following a purchase, and the remaining 30% is paid in the second month. For example, of the $115,000 August purchases, $80,500 will be paid in September and $34,500 in October.
Prepare a cash budget for September, October, and November for Apache Arts Company. Be sure to enter 0 wherever required.